Trump Uncertainty To Be Bullish For Gold Next Week - Analysts

By Neils Christensen of Kitco News
Friday February 03, 2017 14:07

(Kitco News) - With the Federal Reserve in no hurry to raise interest rates, analysts are expecting the gold market to continue to react to ongoing geopolitical concerns created by the new Trump Administration.

Geopolitical uncertainty and what analysts have described as “saber rattling” from President Donald Trump has helped to weaken the U.S. dollar, causing gold to end the week near a 12-week high. April gold futures settled the sesion at $1,220.8 an ounce, up 2.5% since the previous week.

The silver market is also ending the week higher, posting sixth consecutive week of gains. March silver futures last traded at $17.479 an ounce, up 2% since last Friday.

Next week, with little economic data to be released, analysts agreed that gold will focus on geopolitical uncertainty, which doesn’t appear to be abating any time soon. Colin Cieszynski, senior market analyst at CMC Markets Canada, said that markets will continue to react to the fact that the new administration has pretty much picked a fight with all of its allies, which has caused the U.S. dollar to tumble.

“I think markets will continue to react to Trump. Investors are going back into gold because they just don’t know what he is going to tweet next,” he said. “The potential for a major political misstep is growing.”

However, if Trump is able to focus on other issues like moving his fiscal or tax reform policies forward, that could calm markets, taking some momentum away from the precious metal, he added.

One particular focus for some analysts will be potential comments from Trump regarding the U.S. dollar. Traditionally the U.S. government has pursued a strong dollar policy; however in the last week, Trump trade advisor Peter Navarro said that Germany is benefiting from a "grossly undervalued" euro.

“The U.S. dollar is getting to levels where we could see significant long liquidation. The U.S. dollar is going to be sensitive to Trump’s comments,” said Ole Hansen, head of commodity strategy at Saxo Bank.

“If there is significant selling in the U.S. then we will see a strong bid in the gold market,” he added.

Fawad Razaqzada, technical analyst at City Index, said that while he is watching the U.S. dollar, he is also watching equity markets. If the U.S. dollar weakens but equities push to new record highs, gold could still suffer, he said.

He added that he is bullish on gold in the near-term as prices push above $1,220 an ounce.

“If we break above $1,220 an ounce, there is a good chance that prices move to $1,250,” he said.

The Fed Has No Ammunition To Raise Rates

Not only will geopolitics support the precious metals complex, but the threat of an imminent Federal Reserve rate hike has now disappeared.

Positive data released at the start of the week promoted markets to start pricing in a potential March rate hike; however, those odds have dropped following the release of disappointing wage growth data for January.

“Wage growth shows that inflation isn’t a major concern right now and that means the Fed has no ammunition for a March rate hike,” said Hansen.

CME 30-Day Fed Fund futures are only pricing in a 9% chance of a rate hike, down from 18% priced in the previous day.

June continues to be seen as the most likely month for the first rate hike of the year but even these expectations have fallen slightly. Markets are pricing in a 64% chance of at least a 25 basis-point hike, down from 67% priced in during the previous session.

Levels To Watch

The latest rally in gold has pushed prices to a key technical level with analysts noting that $1,220 presents a 38.2% retracement of the July high to December’s Low. According to some technical analysts, the next level to watch is the $1,250 area, which represents a 50% retracement of the correction.

“A recovery back to $1220 would show more gains are on the way, with a move higher targeting $1237 and then $1254,” said Chris Beauchamp, market analyst at IG.

On the downside, investors will have to wait and see if gold can hold the psychological level of $1,200 an ounce. A break of that level would lead to a test of $1,180 an ounce, which represents the metals 50-day moving average.