By Neils Christensen of Kitco News
Friday November 04, 2016 13:20
(Kitco News) - With October’s employment report all but confirming a Federal Reserve rate hike in December, all the focus is on next week’s U.S. presidential election, with gold investors holding their breaths until Wednesday.
Gold could swing within a range between $1.250 and $1,400 next week depending on the results of the U.S. electionGold is preparing to end its fourth week in positive territory as election jitters have driven gold’s safe-haven appeal. Gold has pushed to the key psychological $1,300 an ounce level as national polls between Republican candidate Donald Trump and Democratic candidate Hillary Clinton narrowed this past week.
According to polling website Fivethirtyeight.com, Clinton continues to lead the national popular vote at 48.5% with Trump picking up momentum at 45.2%.
Ahead of Friday's settment, December gold futures last traded at $1,305 an ounce, up more than 2% from last week's close.
Analysts noted that if Trump can ride his new-found momentum all the way to the White House, gold prices could push to $1,400 an ounce in immediate reaction. On the flipside, if Clinton wins the election, gold prices could fall to $1,250 an ounce.
Analysts said they see more potential for gold with a Trump victory because of his lack of political experience and the uncertainty surrounding his policies, which some economists have warned could spark global trade and currency wars.
However, taking the election out of the equation, Ole Hansen, head of commodity strategy at Saxo Bank, said that gold’s risk-reward picture is skewed to the upside, particularly after Friday’s employment report, which showed strong gains in wage inflation.
“Even though the Fed is set to raise interest rates in December, rising inflation shows that the Fed has fallen behind the curve and that is positive for gold,” said Simona Gambarini, commodities economist at Capital Economics.
December Rate Hike – A Sure Thing?
As expected the U.S. central bank left interest rates unchanged this past week; however, markets continue to look for December with CME 30-Day Fed Fund futures pricing in a 72% chance of a 25 basis-point rise in interest rates.
Expectations solidified Friday following the October employment report, which showed that 161,000 jobs were created last month, slightly down from expectations for gains of around 170,000 jobs.
Growing expectations for a year-end rate hike could push the U.S. dollar and bond yields higher in the near-term, but according to Hansen said this will not be a major obstacle for gold prices.
He agreed with Gambarini that rising inflation expectations will limit the impact of high bond yields. He added that real interest rates will continue to remain fairly low.
As for the U.S. dollar, Hansen added that the correlation with gold appears to be breaking down.
“Gold did fairly well last week during the latest stint of U.S. dollar strength,” he said. “Going forward, a stronger U.S. dollar won’t prevent gold from moving higher but it will slow down the pace of the rally,” he said.
However, Fawad Razaqzada, technical analyst at City Index, is not as optimistic that gold could withstand a stronger U.S. dollar as he sees the recent weakness as a short-term trend. He added that a surge in U.S. dollar strength could push gold back down to $1,277 an ounce.
“After all, the Fed remains the only major central bank looking to increase rates while the rest are still pretty much dovish across the board and will likely remain that way for the foreseeable future…” he said. “Thus, in my view, the dollar could go higher, much higher, over the long term outlook.”
Level To Watch Next Week
Althgouh analysts said that gold’s push into the $1,300 territory was the first hurdle the market had to overcome; analysts agreed that it still doesn’t officially signal an end to its correction phase from late-September. Ole Hansen said that the next resistance level to watch will be $1,308 and then $1,325 as that represents the halfway mark between July’s 13-month high and October’s four-month low.
Joshua Mahony, market analyst at IG, said that gold needs to break above $1,307 to see further substantial gains.
“To the downside, watch $1295 as near-term support,” he added.
Currency strategists at Daily FX said that if gold can’t break above $1,308 an ounce then they see prices falling to support at $1,282. The next level below that lies at $1,268 an ounce, they added.
The Final Say
Aside from the U.S. election, the nation’s economic cupboard is fairly bare. With the Fed meeting now finished, central bankers will start to come out of the woodwork; however, with expectations so high for a December rate hike, they might not be able to add much to the outlook.