Brute March? Gold price at risk of lightning collision up to $ 1,600 – analysts

(Kitco News) The first week of March was a damaging week for gold as prices broke the $ 1,700 psychological level. The most important question in everyone’s mind is just how much lower can gold go before it goes down?

Since the beginning of the year with more than $ 200, gold investors have been looking for the magic line in the sand that will signal the end of the deteriorating trend. At the time of writing, April Comex’s gold futures are trading at $ 1,699.10, down 2.8% over the week.

The biggest culprit was the rising US Treasury yield of ten years, causing a stronger U.S. dollar to weigh gold. And the message from this week’s Federal Reserve Chairman Jerome Powell, who largely ignored concerns about inflation and rising yields, did not help.

‘Powell’s failure to push back the recent rise in bond yields has taken away the luster of gold ownership. This has given a short-term outlook for the dollar, which weighs gold. “We are not going to have a week and a half of no comments from the Fed, which is their eclipse period until the next monetary policy meeting on March 17,” Edward Moya, senior market analyst at OANDA, told Kitco News. “We will see the bond market run free. At the moment, there is short-term pressure that could keep gold vulnerable.”

Markets are worried about the sudden rise in yields. There was an expectation that Powell would point to a plan to prevent the long-term curve from rising further, said Peter Hug, global trade director at Kitco Metals.

“In response, shares and the commodity complex as a whole sold at higher rates and a stronger dollar,” Hug said Friday.

However, analysts still expect the Fed to eventually get involved – probably when 10-year yields rise north by 1.75%.

“A shift of more than 1.7% in ten-year yields by the Treasury is not a big deal. If we come north of 1.75% and flirt with 2%, it will be significant,” he said. Hug. “North of 1.75%, the Fed will start looking at it more seriously.”

Once the 10-year starts to challenge 2%, it will ring alarm bells; the stock markets will react negatively, said Bart Melek, head of TD Securities’ global strategy.

“It will surround this whole idea of ​​stable monetary conditions,” he said. “What the Fed is looking at is not just returns, but also the broader financial conditions. Once the central bank makes clear that there is a red line for returns, we can see that gold is doing better.”

‘Gold is at a critical point’

As the focus remains on rising yields and the dollar, what does this mean for gold in the short term?

According to Hug, gold could look at the $ 1,685 level next week, which according to Hug will apply. “Gold is critical if you follow the Fibonacci indicators,” he said. “I expect a bounce from a technical perspective – gold will close at $ 1,700 next week, which is a psychological level. The $ 1,725 ​​is the next resistance level, followed by $ 1,750.”

However, there is a clear risk of a fall towards $ 1,660, and even lower, Melek pointed out, noting that the Fed needs to make clear exactly when and under what circumstances the central bank can intervene to curb the yield curve. control. “Good economic figures next week could make the low 1600s an area rather than a hard stop,” he said.

If gold could not hold $ 1,675 next week, the market could reach $ 1,610, Sals Lusk, co-director of Walsh Trading, told Kitco News. “We have to settle at least more than $ 1,675 next week, otherwise all bets are off.”

If key support levels do not hold, gold could see a lightning strike of up to $ 1,600, Moya added, pointing out that this would likely be the bottom line.

“I expect we can see $ 1,600 at the moment – a rapid collapse. But it is also where buyers will emerge strongly. It will be an attractive buying point for many institutional investors,” Moya said.

Hug is still building on gold in the medium term, adding that the fiscal stimulus will not disappear any time soon as the Fed does not intend to reverse the policy until 2022. “If the longest end of the curve continues to blow higher, the Fed will take action to bring it under control,” he noted.

Melek is also optimistic about gold by the end of 2021 and notes that prices will be significantly higher until 2022.

“There are large amounts of debt, concern about the devaluation of currency, and the government has no choice but to earn all the paper. We will have inflation. And once the market is set on it, long positions in gold will return,” he said. .

Events to watch next week

Economic data will continue to improve next week, and attention will be drawn to the progress around the $ 1.9 billion stimulus package over the weekend.

“The chances are high that you will see a lot of optimism as the outlook continues to improve. We will start reopening Texas, and it will be very positive for the labor market and economic activity. Economic data. It will increase yields,” he said. said Moya.

Virus mutations and their impact on the US are one thing to keep a close eye on because it could derail the expected economic recovery, he added. “If virus mutations become a problem in the US, it could derail the reopening idea, which could lower yields and increase gold again.”

US inflation data will also be important next week, with the consensus of the market that the annual core CPI number will be 1.4% in February.

“Headline inflation is likely to move slightly higher this week, mainly due to rising petrol prices, with the annual rate of headline inflation at 1.4% from 1.4%, while core (ex-food and energy) at 1.4 % remain, “said ING economists.

The Bank of Canada and the European Central Bank will also make their monetary policy announcements on Wednesday and Thursday. No significant changes in rates are expected. Traders will also be watching U.S. unemployment claims and PPI data on Friday.