(Kitco News) Gold was hit by a string of negative news this week, and the disappointing price action reflected that, with the precious metal down $ 45 from last week’s close. But the question on everyone’s mind is how much further can gold fall before entering another bullish phase?
Analysts say the mid $ 1,700 is a great buying opportunity. Still, this doesn’t mean gold won’t fall to even lower levels next week.
This week’s primary downward pressure came from rising US Treasury yields coupled with the stronger US dollar.
“If you look at gold in a basket of other metals, it’s only gold that has gone down. Silver is doing well, as are platinum, palladium and rhodium. You get a pretty significant steady interest in white and industrial metals,” “said Peter Hug, global trading director at Kitco Metals.” Gold has been affected by the significant increase in 10-year earnings. “
Yields on 10-year government bonds started the week at 1.15% and rose to 1.33% on Friday. “This has taken away some of gold’s lead, because that rise in yields has empowered the US dollar,” explains Hug.
The headlines were not overly encouraging either, with BlackRock choosing silver over gold and DoubleLine CEO Jeffrey Gundlach choosing bitcoin over gold as a better “stimulus asset.”
Gold prices fell all week until they hit an 8-month low of $ 1,760.40 on Thursday, causing a small recovery. At the time of writing, April Comex’s gold futures were trading at $ 1,781.20, up 0.41% one day.
Where to now?
Next week will be all about where the US dollar is moving, LaSalle Futures Group senior market strategist Charlie Nedoss told Kitco News. “The dollar’s strength could decline next week and we could see gold bounce off the bottom,” Nedoss said.
The fact that gold is currently trading above $ 1,778 gives the precious metal a chance to move higher next week, Hug emphasized. “This is based on technical factors, assuming gold can stay above that level by closing above it. I’d rather be long at $ 1,775 an ounce than short,” he said.
In addition, the underlying print for inflation appears to be accelerating, Hug noted, citing stronger PPI data. “I see these downturns as buying opportunities, not opportunities to panic and liquidate,” he said.
On the upside, we need to get through USD 1,800, which is not a significant resistance level, and then through USD 1,825 before returning to the USD 1,900 uptrend, “Hug said.
But if sales accelerate next week, gold should be ready to test $ 1,750 and then $ 1,725. However, I don’t think that’s likely, he added.
If yields and stocks continue to rise, gold could look to much lower levels, warned Daniel Pavilonis, senior commodity broker at RJO Futures.
“As stocks get stronger, interest rates get stronger, and gold reaches a level where if we start to close below the $ 1,766 low, we can go a lot lower,” Pavilonis said. “For me that is the line in the sand. If we stay above it, we are range-bound.”
Gold may even hit as low as $ 1,200 this year before resuming its bullish trend, Pavilonis noted. “It won’t drop to $ 1,200 right away, but as real interest rates rise, it will eventually weigh on gold before these dynamic shifts occur,” he said. “The $ 1,527 level would be the first real support.”
On the downside, gold is at risk of losing another $ 100, Melek added, citing rising returns. “The yield curve continues to steep without inflation rising. Real interest rates are rising,” he said. “If we get real interest rates to rise, it will be very difficult to see large flows into gold.”
Another obstacle to gold is competition with bitcoin. The cryptocurrency is being treated like digital gold by investors, Pavilonis added.
“If we put bitcoin in the same camp as metals, it outperformed gold and silver. This is what people are looking at now. Gold has traditionally been an alternative – a hedge against inflation if you want to get yourself out of the system. is also observed, ”he said. “But as bitcoin gets more expensive, investors will wonder why aren’t they buying gold?”
Powell’s Testimony
One of the most significant events next week is the testimony of Federal Reserve Chairman Jerome Powell before the United States Senate on Tuesday.
Markets will be looking for fresh confirmation that the Fed will ignore rising inflation and keep interest rates around zero. Investors will also want to see under what conditions the Fed would consider controlling the yield curve.
“If the Fed actually starts to hike interest rates because we start accelerating inflation, that would be a critical time for gold,” Pavilonis said. “Earlier Powell said the Fed is letting inflation go. I think that would cause futures to get lower and interest rates higher, and gold could fall.”
The words Powell will use are crucial because his testimony is linked to the release of the Federal Reserve’s half-yearly monetary policy report, ING economists said.
“It will be a tricky path for Powell to walk,” said the economists. “ It will be difficult to argue that the economy remains weak and that risks are downward, but he also does not want to sound too optimistic as that could lead to further sharp moves that hike government bond yields, driving the recovery and could hinder the result. in wider market volatility. “
The focus will also be on the US stimulus package next week, which is likely to see more US officials highlighting how crucial it is to get it approved.
Powell could reiterate that there is a need for more fiscal stimulus. Treasury Secretary Janet Yellen has already come out and said it is crucial that the stimulus package comes true. There is enough juice behind the concept to create a stimulus package. let it succeed, ”Hug said. However, some questions remain. We see resistance not only from the Republicans but also from the Democrats. I want to see if they need to water the bill. ‘
Data to view
Big macro data day is Thursday, with preliminary US Q4 GDP, durable goods and unemployment claims all on the agenda. The markets will also process the PCE price index on Friday.
Other data includes the US house price index and CB consumer confidence on Tuesday, followed by new home sales on Wednesday.
“The US data for the next week should be a modest upward revision of the GDP figure for 4Q20 and then Friday, January, the personal income data. This is expected to increase thanks to stimulus controls, but should already be priced in. We’re also seeing the Fed’s preferred measure of inflation – the core PCE deflator – expected to be curbed near 1.4 / 1.5% year-on-year in January, ”said ING FX strategists .
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