Neils Christensen Friday June 09, 2017 13:38
(Kitco News) - The gold market is not ending the week on a very strong note and could be in for more weakness in the near-term as it has not only failed to make new highs for the year, but was unable to hold above a key six-year downtrend level.
Despite rallying to seven-month highs mid-week, gold was unable to hold those gains as prices ended the week 0.68% lower, last trading at $1,271.40 an ounce Friday..
Silver is seeing its four-week winning streak come to an end with prices last trading at $17.225 an ounce, down 1.7% from last week.
According to some analysts, the gold market got ahead of itself as the rally earlier this week drove prices to test key resistance just below $1,300 an ounce. Analysts noted that the U.S. dollar managed to regain some momentum ahead of next week’s Federal Reserve monetary policy meeting as a result of a weaker Euro and British pound.. A stronger U.S. dollar is creating some strong headwinds for gold and even a “dovish” rate hike next week might not be enough to boost the yellow metal.
“I think the market is already expecting a dovish rate hike,” said Colin Cieszynski, senior market analyst at CMC Markets. “The U.S. Dollar Index is trading at 97 heading into the rate hike. Ahead of the March rate hike, the dollar was trading at 102,” he said.
While Cieszynski is expecting to see lower prices in the near-term, he added that he remains bullish on gold in the long-term and sees any drop as a buying opportunity. He added that he would not be surprised to see gold eventually test support at its 200-day moving average at $1,252 an ounce .
“Despite near-term weakness, gold is still in a rising uptrend. The number of risks heading into the fall continue to mount and that will be bullish for gold in the long-term,” he said.
Christopher Vecchio, senior currency strategist at DailyFX.com, said that he is also expecting to see lower prices in the near-term but sees the current correction as a buying opportunity.
He said that there continues to be growing risks that the Federal Reserve will have to throttle back its interest rate expectations as wage growth and inflation remain muted. He added that a recent spate of mediocre economic data does not support a third rate hike this year.
Markets See 100% Chance Of Rate Hike Next Week
Heading into next week’s Federal Reserve monetary policy meeting, CME 30-Day Fed Fund futures are pricing in a 100% chance of a rate hike; however, markets are looking past next week’s meeting and will be looking for clues to see if there will be a third or fourth rate hike.
Currently, markets are pricing in a less than 50% chance that rates will rise a third time in December.
Vecchio said that these low expectations does create some risk for gold later in the year.
“If the economic data starts to improve then there is scope for expectations to shift and that could weigh on gold,” he said.
U.S. Interest Rates Are Outweighing Geopolitical Uncertainty For Now
Not only did the testimony from former FBI director James Comey fail to create a bid for gold, but the U.K. election saw Theresa May’s Conservative Party lose a majority, resulting in a hung Parliament ahead of the start of Brexit negotiations next week.
Jasper Lawler, senior market strategist at London Capital Group, said that the UK election result is a fairly complex issue and could be too big for global markets to focus on. Instead, traders are taking a simplified view, buying the U.S. dollar and punishing the pound as a result of the election.
That strength in the U.S. dollar is what is driving gold prices lower, said Lawler.
“Markets see this as a domestic issue now and maybe the results don’t justify a bid in gold at the moment,” he said. “You can’t deny gold’s failed break out. The drop off we have seen is not something you would expect to see in a bullish uptrend.”
Levels to Watch
With gold’s failed breakout, investors are back to watching the key level at $1,280 an ounce, which represents a six-year downtrend. Not only does gold have to break that but according to some analysts, prices have to close above the April highs to regain enough momentum for a sustained break above $1,300 an ounce.
With analysts seeing renewed downside momentum, they say that the first key support level is at $1,260 an ounce, which represents an uptrend from the December 2016 and March lows.
Some analysts are also watching gold’s 200-day moving average as an important support level, which comes in at $1,252 an ounce.
The last key support level comes in at $1,236 an ounce, a 38.2% retracement level from December’s low to April’s high.
The Final Say
While next week’s Federal Reserve interest rate decision is the main event next week, there are other important events that could create some volatility in markets.
Next week, markets will receive inflation data, with the release of May’s Producer Price Index and Consumer Price Index; May retail sales numbers; regional manufacturing data for June; and, housing data for May.
By Neils Christensen