(Kitco News) – The gold market has been fairly resilient in the face of a three-week rally in the U.S. dollar and now that momentum in the greenback is starting to weaken, analysts say that gold has an opportunity to push back to the top end of its trading range.
Ending a three-week losing streak, gold prices are looking to close the latest week with modest gains. June gold futures last traded at $1,321.30 an ounce, up 0.5% from the previous Friday.
Meanwhile, silver is starting to make a move against gold as it sees solid gains for the week. July silver futures last traded at $16.75 an ounce, up 1.4% from the previous week. Although still elevated, the gold/silver ratio has dropped from its recent highs to hover around 79 points, according to the latest data on Kitco.com. Silver has had an impressive run since the start of the month, rising more than 4% after hitting a five-month low.
Turing back to gold, according to some commodity analysts, the precious metal is getting a modest boost from a weaker U.S. dollar as inflation, while ticking higher, does not support aggressive Federal Reserve monetary policy tightening.
The latest Consumer Price Index report, released Thursday, showed that annual core inflation, which strips out volatile food and energy prices, increased 2.1% in April, less than economists were expected.
“If inflation is stalling, the Fed will have no chance in hiking four times this year. Furthermore, their message last week was one in which they implied they will allow inflation to run hot rather than hike four times,” said Bill Baruch, president of Blue Line futures. “If this data continues to slow, the third hike will then come into question; this would be one of the many catalysts that could send Gold above $1,400 by August or September.”
The Gold Market Has Fundamental Support
Fawad Razaqzada, technical analyst at City Index, said with momentum fading in the U.S. dollar, he expects gold to push higher in the near-term. He noted that gold, compared to other currencies has held its own against the U.S. dollar. Not only has gold managed to hold critical psychological support above $1,300 an ounce but it also held its 200-day moving average, unlike the euro and the pound.
Razaqzada added that gold has also been resilient in the face of a stronger equity markets. He noted that the S&P 500 has rallied 5% after it bounced off its 200-day moving average at the start of the month.
“Gold’s resiliency shows that there is fundamental support in the marketplace that will keep prices above $1,300 an ounce,” he said. “When an asset class shows relative strength then you have to pay attention.”
While gold has seen lacklustre safe-haven demand, Razaqzada said that sentiment could start to shift as investors pay more attention to the flattening yield curve.
Currently, the spread between two-year and 10-year Treasury yields has fallen to its lowest level since 2007. Many economists have noted that a flattening yield curve raises the threat of a recession, and could weigh on fragile equity markets, giving a further boost to gold prices.
Gold Not Out Of The Woods Yet
Despite the bounce off critical support, gold still has to clear a few hurdles to attract new momentum flows. Lukman Otunuga, research analyst at FXTM, said that gold needs to push above resistance at $1,324 an ounce to signal a move to $1,340 and back to the top of its well-established range.
“With a softening Dollar empowering Gold bulls, further upside could be on the cards if prices are able to conquer the $1324 level,” he said.
Scott Grecas, market analyst at Long Leaf Trading, said that he is near-term bullish on gold as momentum shifts in the marketplace, but he added that the U.S. dollar is not expected to drop sharply anytime soon. He said that the greenback should continue to find support from a positive equity market, which continues to see strong first quarter earnings season.
Grecas explained that gold is not expected to break out of its near-term range anytime soon as option markets are only pricing in an $18 range for the yellow metal in the next few weeks.
Even if gold is unable to retest its recent highs, Christopher Vecchio, senior currency strategist at Dailyfx.com, said that he doesn’t think U.S. dollar momentum will last. He added that he prefers to buy gold as a long-term investment on dips around $1,305 an ounce.
“I don’t think much has changed for gold and until we break below March support at $1,302, I will continue to maintain my bullish outlook,” he said. “The U.S. dollar has found some recent momentum but my budget deficit concerns have not changed and I think this will be an issue later in the year.”
Grecas also sees less long-term support for the U.S. dollar because of the deficit issues.
The Final Say
Because of growing concerns over the U.S. economy, in a flattening yield curve environment, economic data are expected to have more impact on markets than in recent weeks. Next week the economic calendar will be laden with important reports with April’s retail sales figures as the highlight.
The market will also receive regional manufacturing data for May and housing construction data for April.
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