(Kitco News) - Gold prices are preparing to end its second week in negative territory as it struggles against a stronger U.S. dollar, rising interest rate expectations and stronger equity markets.
However, despite all the negatives in the near-term, analysts note that the yellow metal has been extremely resilient as prices hold key support levels at $1,320 an ounce. August comex gold futures ended the week at $1323.40 an ounce, down less than 1%.
Silver is also ending its second week in negative territory and underperforming the gold market. Prices ended the week at $19.689 an ounce, down 2.7%.
“There is a huge trend line that comes in at these current levels,” said Bill Baruch, senior commodity broker at iiTrader. “Prices could continue to consolidate but they are building support for another move higher. Traders just have to be patient; it is only a matter of time,” he said.
Gold managed to hold support at a three-year low despite the U.S. dollar rebounding to its highest level in four months.
However, sentiment and conviction in the gold market appears to be weakening in the near-term as investors prepare for a major week of economic data, including two key central bank meetings.
A Tale Of Two Central Banks
After two relatively quiet weeks of economic data, the calendar heats up next week with the Federal Open Market Committee and the Bank of Japan meeting next week.
The Federal Reserve will be first up to bat and although it is not expected to raise interest rates at its July meeting, investors and traders will be going through the monetary policy statement with a fine tooth comb looking for hints as to the timing of the next potential rate hike.
While expectations are once again shifting towards higher interest rates, there doesn’t seem to be a clear consensus among economists, with some calling for a move in September and other calling for a move in December.
Looking at CME 30-Day Fed Fund futures, markets are pricing in a 2.4% chance of a rate hike next week, up slightly from a zero percent chance earlier in the week. For September, markets are pricing in a 20% chance of a 25-basis-point hike. Markets are forecasting a 21% chance of a move in November and a 10% chance in December.
Darin Newsom, senior analyst with DTN, said that the gold market appears to be preparing for the Fed to signal its next move, adding that the key support level he will be watching is $1,299 an ounce.
Phillip Streible, senior market strategist at RJOFutures, said that with still so much uncertainty in financial markets, he is expecting the Fed to strike a neutral tone and temper its hawkish tone by noting growing risks to the global economy.
Baruch also said that he is not expecting the Fed’s tone to be as hawkish as some economists are expecting. Although this will be bullish for gold, he said that the big meeting next week will be the Bank of Japan.
He added that the BOJ meeting could be a win-win for gold.
“If the Bank of Japan introduces more stimulus measure, it will crush negative bond yields even lower, which makes gold more attractive and it will rise despite a stronger dollar,” he said. “If the Bank of Japan holds off on new measures then the yen will rally and gold loves to follow the yen.”
Equities To Impact Gold Prices
Jeffrey Nichols, senior economic advisor at Rosland Capital and managing director at American Precious Metals Advisors, said that he is bullish on gold as equity markets appear to be overvalued and are due for a correction.
“The stock market is getting out of balance and that suggests we are in for a serious correction,” he said. “When the market does start to fall, gold will rally in a big way,” he said.
In the near-term, Nichols said that he expects the $1,320 level to hold as near-term support and attract some new buying interest.
Level To Watch Next Week
Technical analysts at Daily FX wrote in a report Friday that there are signs the gold market is aiming for higher prices; however, they noted that they need to see a close above $1,352 to signal a push back towards the two-year high hit at the start of the month On the downside, they are watching support at $1,308.
Chris Beauchamp, market analyst at IG, said that renewed momentum could push prices to $1,335, which could lead to a test of their next support level at $1,375.
However, he added that “Weakness could see a test of support at $1310, $1300, and then on to $1280.”
Although Newsom is expecting prices to trend lower in the near-term, he added that gold prices will still remain in their long-term uptrend. For the bull market to be threatened, prices would have to fall back to $1,200 an ounce.
Tom Kendall, ICBC Standard Bank analyst, said in a report Friday that gold could see a 4% or 5% correction, which would push prices to $1,280 an ounce. However, he added that any price drop would be short-lived as it would attract new buyers.
“I just don’t see that happening anytime soon,” he said.
The Final Say...
All eyes will be on the BOJ and the Fed. Other important economic reports to be released next week include July consumer confidence, June durable goods reports, more June housing sector data and regional manufacturing data for July.