(Kitco News) Gold was hit by a slate of negative news this week and disappointing price action reflected that, with the precious metal falling $ 45 from last week’s close. But everyone’s question is how much gold can fall before entering a new bullish phase?
According to analysts, the average level of $ 1,700 is a great buying opportunity. Still, that doesn’t mean gold won’t go down to even lower levels next week.
The main downward pressure this week came from rising U.S. Treasury yields mixed with the stronger U.S. dollar.
“If you look at gold in a basket with other metals, only gold has gone down. Silver is doing well, as well as platinum, palladium and rhodium. You have a constant and significant buying interest in white metals. and industrialists, ”said Peter Hug, global sales director for Kitco Metals. “Gold has been hit by a significant ten-year yield increase.”
The ten-year Treasury yield started the week at 1.15% and rose to 1.33% on Friday. “This has meant a bit of the gold advantage because this increase in yields has produced strength in the US dollar,” Hug explained.
The headlines were not too encouraging either, as BlackRock chose silver over gold and DoubleLine CEO Jeffrey Gundlach chose bitcoin over gold as the best “asset of stimulus ”.
Gold prices fell all week until they hit an eight-month low of $ 1,760.40 on Thursday, prompting a small recovery. At the time of writing, April Comex gold futures were trading at $ 1,781.20, up 0.41% on the day.
Where to go?
Next week will be about where the US dollar is moving, LaSalle Futures group senior market strategist Charlie Nedoss told Kitco News. “The strength of the dollar could decline next week and we could see gold bouncing to the bottom,” Nedoss said.
The fact that gold is currently trading above $ 1,778 gives the precious metal a chance to rise next week, Hug noted. “This is based on techniques, assuming gold can stay above that level when you close it. I’d rather the market be long at $ 1,775 per ounce than short,” he said.
In addition, the underlying impression of inflation appears to be accelerating, Hug noted, citing stronger PPI data. “I see these setbacks as buying opportunities, not panic and settlement opportunities,” he said.
On the upside, we need to exceed $ 1,800, which is not a significant level of resistance, and then we need to exceed $ 1,825 before returning to the $ 1,900 uptrend, ”Hug said.
But if the sale accelerates next week, the gold should be ready to test $ 1,750 and $ 1,725. “But I don’t think it’s likely,” he added.
If yields and stocks continue to rise, gold could be at much lower levels, warned Daniel Pavilonis, RJO Futures ’main commodity broker.
“If stocks get stronger, yields rise and gold reaches a level where if we start closing below yesterday’s lows of $ 1,766, we can go down a lot,” Pavilonis said. “For me, that’s the sand line. If we stay above it, we’re limited in range.”
Gold may even touch up to $ 1,200 this year before resuming its uptrend, Pavilonis noted. “It won’t go down directly to $ 1,200, but as real rates increase, that will weigh on gold before that dynamic changes,” he said. “The $ 1,527 level would be the first real support.”
On the downside, gold runs the risk of losing another $ 100, Melek added, citing rising yields. “The yield curve continues to rise without inflation rising further. Real rates are rising,” he said. “If we get real interest rates to rise, it will be very difficult to see large flows to gold.”
Another hurdle for gold is its competition with Bitcoin. Pavilonis added that cryptocurrency investment is treated as digital gold by investors.
“If we put bitcoin in the same field as metals, it surpassed gold and silver. That’s what people are looking at now. Gold has traditionally been an alternative: a hedge against inflation if you want to get out of the system. “That’s how bitcoin is perceived as well,” he said. “But as bitcoin becomes more expensive, investors will wonder why they don’t buy gold?”
Powell’s testimony
Next week, one of the key events will be the testimony of Federal Reserve Chairman Jerome Powell before the U.S. Senate on Tuesday.
Markets will look for another confirmation that the Fed will ignore rising inflation and keep rates close to zero. Investors will also want to see under what conditions the Fed would be concerned to introduce control of the yield curve.
“If the Fed starts raising rates because we’re starting to see inflation accelerate, this would be a crucial time for gold,” Pavilonis said. “Earlier, Powell said the Fed is releasing inflation. I think that would cause futures to go down and yields to go up, and it could cause gold to go down.”
The words Powell will choose to use will be crucial because his testimony is tied to the release of the Federal Reserve’s half-yearly monetary policy report, ING economists said.
“It’s going to be a tricky road for Powell,” economists said. “It will be difficult to argue that the economy remains weak and the risks are downward, but you will not want to sound too optimistic either, as this could lead to stronger movements in Treasury yields, which could impede recovery and the result in wider market volatility “.
Next week will also focus on the U.S. stimulus package, which is likely to show that more U.S. officials will stress how critical it is to achieve this.
“Powell could reiterate that there is a need for more fiscal stimulus. Treasury Secretary Janet Yellen has already come out and indicated that it is critical that the stimulus package comes out. There is enough juice behind the concept to get a package. of stimulus approved, ”Hug said. “However, there are some questions left. We are seeing some resistance not only from Republicans but also Democrats. I want to see if they have to lower the bill.”
Data to see
The big day of macro data will be Thursday, with U.S. quarter-quarter preliminary GDP, durable goods and unemployment claims. Markets will also digest the PCE price index on Friday.
Other data will include the U.S. home price index and CB consumer confidence on Tuesday, followed by new home sales on Wednesday.
“Next week’s US data is expected to see a modest upward revision of the 4Q20 GDP figure, followed by personal income figures on Friday in January. It is expected to jump to the back of stimulus controls, but they should already be priced in. I’ll also look at the Fed’s preferred measure of inflation, the PCE core deflator, which is expected to contain close to 1.4 / 1.5% year-on-year in January, ”ING FX strategists noted.
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