(Kitco News) The first week of March was detrimental to gold as prices topped the psychological level of $ 1,700. Now, the key question in everyone’s mind is how much can gold go down before it goes down?
On the downside of more than $ 200 since the beginning of the year, gold investors are looking for the magic line in the sand that indicates the end of the bearish trend. At the time of writing, April Comex gold futures were trading at $ 1,699.10, down 2.8% on the week.
The main culprit has been the ten-year increase in the yield on the U.S. Treasury, which has led to a stronger U.S. dollar weighing on gold. And this week’s Federal Reserve Chairman Jerome Powell’s message that he largely ignored concerns about inflation and rising yields didn’t help.
“Powell’s failure to reverse the recent rise in bond yields ended the brilliance of holding gold. It has provided a short-term bullish outlook for the dollar, which is weighing on gold. We will have a week and a half of no comment from the Fed, which is its shutdown period until the next monetary policy meeting on March 17, ”OANDA senior market analyst Edward Moya told Kitco News. “We will see the bond market run freely. At the moment there are some short-term pressures that could keep gold vulnerable.”
Markets are worried about the sudden rise in yields. There was an expectation that Powell would hint at some plan to prevent the long end of the curve from rising further, said Peter Hug, global sales director for Kitco Metals.
“In response, stocks and the commodity complex generally sold at higher rates and a stronger dollar,” Hug said Friday.
However, analysts still expect the Fed to eventually get involved, most likely when 10-year yields rise north of 1.75%.
“A step above 1.7% in 10-year Treasury yields is not a big deal. If we get north of 1.75% and flirt with 2%, it would be significant,” he said. Hug. “North of 1.75%, the Fed will start looking at it more seriously.”
Once 10 years start to challenge 2%, it will sound the alarms; equity markets will react negatively, said Bart Melek, head of global strategy at TD Securities.
“This will upset this whole idea of a stable monetary environment,” he said. “What the Fed is looking at is not just yields, but broader financial conditions. Once the central bank makes it clear that there is a red line for yields, we could see that gold is doing better.”
“Gold is at a critical juncture”
Since the focus remains on rising yields and the dollar, what does it mean for gold in the short term?
Gold could be looking at the $ 1,685 level next week, which should hold, according to Hug. “Gold is in a critical technique if you follow the Fibonacci indicators,” he said. “I expect a rebound here from a technical perspective: gold will close and trade $ 1,700 next week, which is a psychological level. $ 1,725 is the next resistance level, followed by $ 1,750.”
However, there is a clear risk of a fall to $ 1,660, and even lower, Melek said, citing the need for the Fed to clarify exactly when and under what conditions the central bank could intervene to control the curve. of profitability. “Good economic figures next week could make the 1600s an area more than a tough stop,” he said.
If gold doesn’t hit $ 1,675 next week, the market could get $ 1,610, Sals Lusk, co-director of Walsh Trading, told Kitco News. “We have to settle at least above $ 1,675 next week or all bets are off.”
If key assistance levels are not maintained, gold could see it drop to $ 1,600, Moya added, noting that this would be a likely fund.
“I anticipate that right now we could see $ 1,600, a rapid fall. But this is also where buyers will emerge. This will be an attractive buying point for many institutional investors,” Moya said.
The hug remains constructive for gold in the medium term, adding that the fiscal stimulus will not go away any time soon, as the Fed does not plan to reverse the policy until 2022. “If the long end of the curve continues to rise, La The Fed will create actions to control it, “he said.
Melek is also optimistic about gold by the end of 2021, noting that prices will be significantly higher until 2022.
“There are large amounts of debt, concerns about currency devaluation and the government has no choice but to monetize all this paper. We will have inflation. And once the market adjusts to that, long positions will be gold again.” , he said. .
Events to see next week
Economic data will continue to improve next week and eyes will be on progress around the $ 1.9 trillion stimulus package over the weekend.
“You are likely to see a lot of optimism as the outlook continues to improve. We will begin to see Texas reopen and it will be very positive for the job market and economic activity. There is a sharp rise for economic data. That will increase yields, ”Moya said.
Mutations in viruses and their impact on the United States are something that needs to be closely monitored because it could derail the long-awaited economic recovery, he added. “If virus mutations become a problem in the United States, it could derail the idea of reopening, which would reduce yields and increase gold again.”
U.S. inflation data will also be important next week, with a market consensus estimating that the number of annual core CPI will be 1.4% in February.
“Global inflation is likely to rise slightly more this week, mainly due to rising petrol prices, with an annual rate of global inflation set at 1.6%, from 1.4%, while the core (ex-food and energy) remains at 1.4%, ”he said. ING economists.
In addition, the Bank of Canada and the European Central Bank will make their monetary policy announcements on Wednesday and Thursday, respectively. No significant changes in rates are expected. Traders will also see U.S. jobless claims on Thursday and PPI data on Friday.
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