(Kitco News) Did gold find its bottom during the lowest ten months of this week? Analysts are waiting to see if the precious metal can hold the amount of $ 1700 per ounce and break free from the chains of the treasury markets.
After falling to a low of $ 1,675 on Monday, Comex gold contracts recovered above $ 1,730 in April.
Friday, gold was lower on the day, but could hold the $ 1,700 per ounce in light of higher Treasury yields. Bond market sales continued after US President Joe Biden signed his $ 1.9 billion stimulus bill on Thursday. At the time of writing, the April Gold futures are trading at $ 1,717.90, which is 0.27% lower on the day.
“Ten-year yields are rising, and the curve is increasing more. Even the shortest end of the curve has increased. This could continue as we see good economic numbers and talk about inflation. More risk appetite leads to rising yields “And this is not a good story for gold,” Bart Melek, head of TD Securities’ global strategy, told Kitco News. “Precious metals are being held hostage by the treasury markets.”
All about returns
US ten-year treasury yields rose above 1.6% overnight. “The returns are still in play. We thought $ 1,675 could be the lowest gold. But it all depends on the returns and whether it will continue to rise,” said Daniel Pavilonis, RJO Futures’ broker. .
The $ 1.9 billion stimulus package is also inflationary. “The market expects consumers to buy goods with the money,” said Kevin Grady, president of Phoenix Futures and Options LLC.
Once everyone in the US is vaccinated, the yield curve will respond, and gold can be difficult, Melek noted.
In addition, markets are beginning to give in to more stimulus measures, including infrastructure spending.
“If money pressure, higher yields and foreign buyers selling our debt are the new MO, there is now more reason to buy emerging markets. The stimulus is ultimately a sign to the rest of the world that we are not in a good “condition is not, and we are waving to pump out more money to save governments,” Pavilonis said.
Eyes on the Fed next week
The current correlation between yields and gold is that as yields increase, gold decreases. That could change in the future, and once that does happen, gold could rise higher, Pavilonis pointed out.
“Ultimately, the correlation will break. The Federal Reserve, which recognizes that we are seeing inflation and that we may have to raise rates more than thought, will break the correlation. Or even just acknowledge that rising yields are worrying,” he said.
The Fed has largely ignored the issue so far, so next week all eyes will be on Fed Chairman Jerome Powell as he holds his press conference following the central bank’s interest rate announcement on Wednesday.
Even the European Central Bank (ECB) came out on Thursday, saying it was concerned about inflation and the pressure of money, Pavilonis said. The ECB has said it will use its Pandemic Emergency Purchase Program (PEPP) to stem any unfounded rise in debt financing costs.
ECB President Christine Lagarde “nonchalantly said that higher returns could lead to premature tightening for financing in all sectors of the economy,” Pavilonis described. She also noted that the ECB wants to maintain favorable financing conditions with inflation threatening in the street.
“If the Fed came out and said something similar, it would be positive for gold … The fact that yields are rising may show that the Fed is losing control,” Pavilonis said.
Melek said Powell is unlikely to make any significant new comments about the rate of return. “Powell will assure us that it is still too early to talk about raising interest rates. He was last time quite ambiguous when yields rose sharply, and the risk appetite was not harmed,” he said.
Powell could try to reduce returns, ‘Grady adds.
The markets will also look at the Fed’s updated quarterly forecasts. And ING economists expect an upward revision of GDP by 2021.
“There will also be a lot of interest in the Fed Funds rate. Will the median of the Fed 2023 rate move to a 25 bp rise? Probably not, but the dollar will probably rise if that does happen.” a largely unchanged FOMC statement and a press conference from Jay Powell reiterating that the Fed has a long way to go to reduce stimulus should prevent the dollar from going too far ahead, ‘the economists said.
Price levels
According to analysts, it is critical to see gold perform next week at the $ 1,700 per ounce level. A progress towards $ 1,760 will be a possible rally to come, while a drop below $ 1,670 could open the door to $ 1,600 per ounce.
“Gold can bounce around here and consolidate for a higher move; must come above $ 1,760 to give confirmation,” Pavilonis said. “The $ 1,670 level is support. If it shakes, we could look at $ 1,600.”
Gold will have to contain $ 1700, said LaSalle Futures Group senior market strategist Charlie Nedoss. “I want to see what it does at $ 1700,” he said.
Melek added that short-term coverage is very likely in the short term. But if the US dollar and yields continue to rise, gold could test $ 1,660 per ounce again next week.
Grady pointed out that it is dangerous to be short gold now, while at the same time it is not beneficial to be long gold either. “Being short gold in the market with so much money pressure and stimulus is dangerous. But every time gold rises, it is sold. Traders want to see or pull the trend,” he said. “That’s why I’m neutral.
Other data to look at
There will also be new economic data to monitor next week. The data releases begin Monday with the NY Empire State Manufacturing Index and U.S. retail sales and industrial production on Tuesday.
U.S. housing starts and building permits must be followed Wednesday, followed by the Philadelphia Fed manufacturing index and unemployment claims Thursday.
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