(Kitco News) – Unless there is a significant breakdown in equities or the U.S. dollar, gold investors can expect to see further grind in the marketplace, according to one commodity analyst.
Although gold prices could test the top end of their range, around $1,350 an ounce, as the market finds support from disappointing labor market data and escalation of trade war rhetoric between the U.S. and China, analysts are not expecting to see a breakout anytime soon.
“I think we could see gold prices push higher by $10 or so but ultimately, interest rate expectations are firmly in place and that will support the U.S. dollar and weigh on gold,” said Bart Melek, head of commodity strategy at TD Securities.
Gold prices are ending the week stuck firmly in the middle of its near-term trading range; June gold futures last traded at $1,334 an ounce, up 0.5% since last Friday.
The silver market is also ending the week in positive territory, but prices are near the bottom end of their trading range as the market continues to underperform gold. May silver futures last traded at $16.335 an ounce, up 0.41%.
Ole Hansen, head of commodity strategy at Saxo Bank, said in a recent research note that silver could be the reason why gold has been able to break near-term resistance at $1,355 an ounce. For now, he looks for gold to remain range-bound in the short-term.
“The uncertain geopolitical outlook and increased stock market volatility is likely to continue to provide some underlying support,” he said. “There’s no doubt, however, that multiple rejections since 2016 are likely to have sidelined potential buyers who are now happy to sit on the fence while waiting for a potential break above $1375/oz, 2016 high.”
What Does Gold Need To Break Out?
David Madden, market analyst at CMC Markets, said that he sees two factors that could drive gold prices higher: weaker equity markets or a weaker U.S. dollar. He added though that there is no indication that investor sentiment is going to shift anytime soon.
Both the Dow Jones Industrial Average and the S&P 500 have managed to hold on to their long-term uptrend, bouncing off critical technical support at their 200-day moving averages. Although there is growing uncertainty in the marketplace, Madden said that consistent investor optimism will continue to support prices.
He added that both the Dow and the S&P 500 have to push clearly below their 200-day moving averages if gold is going to find enough momentum to break its range.
Looking at the U.S. dollar, Madden noted that it before the employment report the greenback traded at a 5.5-week high against a basket of currencies. He added that underlying strength in the U.S. dollar will also weigh on gold prices.
However, Madden is not expecting to see a significant selloff in gold anytime soon as there is substantial underlying support for the yellow metal.
Christopher Vecchio, senior currency strategist at DailFX.com, described the gold market as a “grind.” He added that investors need to be patient as he doesn’t see long-term potential for the U.S. dollar.
“There is so much going on right now that there is no direction in the marketplace,” he said. “If you are going to trade gold then I recommend small positions and for traders to be nimble.”
While gold has room to move higher in the near-term, Vecchio said that he would not chase the market at current levels. He added that he prefers to buy gold at the lower end of its trading range.
“Long-term the U.S. dollar is not in a good position even if it can move higher in the near-term,” he said. “I prefer to buy gold on dips to add to my position and prepare for an eventual breakout. I think we could see gold higher in the second half of the year.”
Vecchio said that he is long-term bearish on the U.S. dollar because the government’s deficit spending is unstainable. He added this topic will become more of an issue later in the year.
U.S. Dollar Still Has Room To Move Higher
While some investors were expecting to see a sharp selloff in the U.S. dollar, analysts note that while the headline data was disappointing, the components of the report were not disastrous. The data showed that 103,000 jobs were created last month, well below expectations for job growth of 188,000 jobs.
At the same time wage growth grew 0.3% last month, in line with expectations. For the year wages increased 2.7%.
Melek noted that wages, while not accelerating, still show healthy growth. He added that the unemployment rate also remains low — two positive factors for the labor market.
“The employment gains were a little disappointing, but the fact of the matter is that the report wasn’t horrible,” he said.
Ultimately, Melek said that the employment report wasn’t bad enough to shift market expectations for the Federal Reserve to raise interest rates in June, which will provide support for the U.S. dollar and cap any gold rally.
But he added that despite expected interest rate hikes, gold is still in a good place.
Levels To Watch
For now, analysts are watching near-term resistance between $1,355 and $1,360 an ounce with a break of that level signaling a move to the 2016 high at $1,375 and then the push to $1,400 an ounce.
On the downside, many technical analysts say that gold remains in an uptrend as long as prices can hold critical support at $1,300 an ounce. In the near-term analysts are watching initial support at $1,325 an ounce.
The Final Say…
With growing focus on the U.S. dollar and interest rate expectations, many economists have noted that next week’s employment data will be important, especially after Friday’s disappointing employment data.
Madden said that any breakdown in the data could weigh on the U.S. dollar and support gold prices.
Next week is a big week for inflation data with the release of the Producer Price Index and Consumer Price Index. The market will also pay close attention to the minutes of the March monetary policy meeting.
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