U.S. Dollar Will Determine If Gold Will Build On New Year Gains - Analysts

By Neils Christensen of Kitco News
Friday January 06, 2017 13:09

(Kitco News) - After a strong start in the first trading week of the new year, some analysts are expecting gold to consolidate in its current range and see any drop , as a buying opportunity.

February gold futures are preparing to end the week with gains of almost 2%, last trading at $1,173.70 an ounce. This is gold’s second weekly gain after seeing its longest weekly losing streak in 12 years.

Silver is also seeing decent gains at the start of the year, up 3% since last week, last trading at $16.50 an ounce.

In what is expected to be a light week for U.S. economic data, analysts say that they will be watching two key markets: the U.S. dollar and US Treasuries to determine where gold is headed in the near-term.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he is expecting to see gold add to its recent gains as uncertainty ahead of President-elect Donald Trump’s Jan. 20 inauguration. He added that there are still a lot of questions surrounding his economic policies and that could keep investors away from the U.S. dollar and into hard assets like gold.

While gold prices have pushed off their 2016 lows since the start of the new year, the U.S. Dollar Index has fallen 1.75% from its nearly 14-year highs.

“I think the strength in the U.S. dollar was overdone, aggressively pricing in four or five rate hikes this year,” said Colin Cieszynski, senior market analyst at CMC Markets Canada.

He added that in the near-term gold could consolidate between $1,172 and $1,200 an ounce in the near-term.

Bill Baruch, senior market analyst at iiTrader agreed that U.S. dollar strength has been too aggressive pricing in interest rate hikes and expects the greenback to continue to lose steam, benefitting the yellow metal.

He added that there is still too much uncertainty in the U.S. economy to fully justify three rate hikes this year. In these current market conditions, Baruch said that any pull back to $1,150 an ounce should be seen as a strong buying opportunity.

When Do Markets See The First Rate Hike

After the Federal Reserve’s December monetary policy meeting, markets started pricing in the possibility of three rate hikes in 2017, in line with the central bank’s projections.

CME 30-Day Fed Fund futures are currently prices in a 40% chance that the first rate hike comes at the May meeting; markets also see a 68% chance of a June rate hike.

Phillip Streible, market analyst at RJO Futures said that he also likes buying gold on potential dips; however, he added that investors could also buy a $1,125 June put option to hedge against the downside.

Level To Watch

Renewed momentum has helped to push the gold price back above a key retracement point at $1,173 an ounce. According to some analysts, this is the first price that has to hold if the market is going to attract new money.

However, for many analysts, gold will remain in a short-term uptrend unless support at $1,150 is broken. Cieszynski said that if this support level falls it could signal that gold is headed back to its December 2016 lows and even back to its multi-year low seen in December 2015.

On the upside, the line in the sand is at $1,200 to $1,205. If prices can break this level then it could attract new buying interest, according to Hansen.

The Final Say

The U.S. economic docket will be light next week with the major report, December retail sales coming out Friday; however, the week is full of Federal Speakers, including Fed chair Janet Yellen.

After this past week’s release of the minutes of the December meeting, where Fed committee members raised concerns about the recent strength of the U.S. dollar, uncertainty over government economic policies markets will be interest to learn any new insights into future monetary policy.