Gold Prices To Find Support Amidst Stronger Equities, says Analysts

(Kitco News) - The gold market is preparing to end the week in negative territory for the first time since mid-May, ending a six-week winning streak.

August Comex gold prices settled Friday’s session at $1,327.40 an ounce, down 3% on the week. However, silver continues to outperform the yellow metal; September silver futures settled the day at 20.165 an ounce, down only 1.15% on the week.

Gold’s selloff came as equity markets made consecutive record highs on a daily basis, a theme that gold investors should continue to watch in the near term. Global uncertainty that has gripped financial markets since the Brexit referendum has begun to dissipate, resulting in renewed risk-on sentiment that has investors jumping back into equity markets.

Although analysts warn that gold could continue to correct in the near term as a result of higher equity prices, they don’t expect that the yellow metal’s bull run to come to an end any time soon.

“I don’t think anyone can accurately predict how high equities will go but eventually higher prices will lead to higher volatility and that will be good for gold,” said George Milling-Stanley, head of gold strategy at State Street Global Advisors. “I know there are investors buying gold in anticipation and to protect themselves against eventually higher market volatility.”

Jessica Fung, commodity strategist at BMO Capital Markets, said that she thinks gold has further room to run as equities rally on global stimulus efforts that have failed to boost economic activity.

“I have no idea why equity markets continue to go up because we have no earnings growth,” she said. “Every time there is stimulus in the market, whether it’s the Fed not raising interest rates or bonds in negative territory, investors jump into equities. At some point, the market has to realize that we have been doing the same thing for such a long time and have not gotten anywhere.”

Watch Technical Levels

Although gold is suffering its biggest weekly drop since May, technical analysts note that the market is holding on to key support levels, which could be seen as a bullish sign.

“Dips such as that seen over the past few days have been taken as buying opportunities in gold’s steady leap higher, and if another bounce occurs we look to $1,350 and then $1,375 as upside targets,” said Chris Beauchamp, market analyst at IG.

According to some analyst, the first support level to watch in the near-term is $1,320 an ounce, a level that the market tested and held twice late in the week. A break of this level could lead to a test of support at $1,308 an ounce.

Ole Hansen, head of commodity strategy at Saxo Bank, said that the gold market’s long-term uptrend remains in place as long as prices remain above $1,300 an ounce.

However, Russell Browne, commodity strategist at Scotiabank, said that analysts are becoming a little more suspicious of the gold market, as prices have breached but not closed below $1,328 an ounce.

“Momentum is falling and MACD (moving average convergence/divergence momentum indicator) is turning bearish, which could potentially lead to a change of my view on gold from bullish to neutral,” he said.

Although gold is holding initial support levels, George Gero, managing director with RBC Wealth Management, said that gold will have to push above $1,370 to encourage funds to jump in off the sidelines and back into the precious metal.

Keep An Eye On Interest Rate Expectations

Along with pushing equity markets higher, the “risk on” sentiment is also causing bond yields to push a little higher, renewing expectations for eventual rate hikes. However, it is important to note that expectations, while bouncing higher, are still at extremely low levels.

The next Federal Open Market Committee meeting will be held on July 27. Ahead of the monetary policy meeting, according to CME 30-day Fed fund futures, markets are pricing in 2.4% chance of a rate hike; for most of the past week expectations have been at zero.

For September, markets are pricing in a 14% chance of a rate hike, up from 12% seen earlier in the week. November expectations have risen to 15%, up from 12%, and the chance of a December rate hike has risen to 38% up from 34%.

Still a lot of Pent-Up Demand

Although a correction in gold would be healthy for the market, Milling-Stanley added that with more than $10 trillion worth of bonds offering investors negative returns, there is still a lot of demand for alternative safe-haven assets.

He added that he expects this safe-haven demand to limit gold’s downside potential.

“I don’t think that investors waiting to get into the gold market should expect to see a big correction,” he said. “There is a lot of uncertainty out there and any small dip in the price will be seen by many as a buying opportunity.”

The Final Say…

The European Central Bank will hold its monetary policy meeting next week, and markets will be anxious for any potential stimulus plans for the European economy.

Stephen Brown, European economist at Capital Economics, said the firm is not expecting to see any new initiatives at this meeting but expects ECB President Mario Draghi to signal more stimulus at the September meeting.

Gold prices have seen decent gains against the euro, because of the Brexit referendum and the uncertainty it creates for the European economy. Analyst noted that broad-based gains against major global currencies have helped support gold prices along with a stronger U.S. dollar.

Any new ECB stimulus measures would be positive for gold in euro terms, which could spill over in the bigger North American market.

There is little U.S. economic data for investors to chew on next week but analysts note that the second-quarter earnings season has kicked off and they are expecting gold will continue to take its cue from equity markets.

Some of the key data points for next week include U.S. housing market data and some more regional manufacturing data.

Courtesy: Kitco News