Gold seems to have bottomed and it is now sitting comfortably above $1,700 per ounce. Analysts wonder whether it is ready for liftoff towards $1,900. Many are still bullish but say that the precious yellow metal needs a new catalyst to get to that level once more.
After a busy week, gold managed to remain above $1,720. The metal even tried to break the critical resistance zone around $1,750 on March 25. The move up failed but the June Comex gold futures were last seen trading at $1,733.90, up 0.38% on the day. Commerzbank analyst Eugen Weinberg mentioned:
“Factors that would normally weigh on gold, such as rising stock markets and the firm U.S. dollar, do not appear to be pressuring its price all that much at present.”
The trading pattern might be a sign that the time has come to start picking up gold, according to RJO Futures senior commodities broker Daniel Pavilonis. He said:
“Market sentiment is low compared to where it was back in August. This is a good sign. It is probably the time to start picking up gold. Next week, we could see more of an up week for gold.”
Currently, gold is getting pulled by two different outlooks; the short-term risk-on view that is based on vaccinations and the economic recovery. On the other hand, the long-term risk-off view is filled with uncertainty and an accommodative Federal Reserve. TD Securities head of global strategy Bart Melek highlighted:
“I’m not surprised we are not breaking to the upside yet. The U.S. dollar continues to be firm. It will be firm for the next little while as Europe is shutting down after failures with vaccine distribution. Flows of funds are likely to skew to the U.S.”
But, there is uncertainty in the long-term. Melek also pointed out:
“We happen to think we break out into $1,900 by year-end because we will see inflation and no action from the Federal Reserve. Also, we’ll have more debt and more infrastructure spending.”
Possible Catalysts
Gold is not likely to surge until there is a new catalyst to push it upward. Standard Chartered precious metals analyst Suki Cooper mentioned:
“Gold appears comfortable at current price levels. Physical demand offers a cushion on the downside, but a macro catalyst to drive upside risk is absent.”
One possible catalyst might be gold’s break from the 10-year Treasury yields. In recent months, gold has continuously been dragged down when the yields go up. But this inverse relationship may break, eventually helping gold to surge. Pavilonis explained:
“Rates are going up a bit today, and gold is holding well. It is a positive sign. Maybe we start to snap free of the correlation that if rates go up, gold has to go down. If we can deviate away from that with the announcement of Biden’s new infrastructure package, it will be good for gold. When we see inflation, it is time to buy gold.”
More money is being printed and more accommodative policies still dominate the global economic scene. With these factors still dominant, inflation will come in and the February low may be the bottom for the precious metal. Pavilonis noted:
“The longer we see sideways price action in gold, the more the path of least resistance becomes to the upside.”
Another catalyst might be the US dollar finally losing some steam. Cooper stated:
“As the year unfolds, the USD resumes its downtrend, and real yields remain negative, prices are likely to regain traction.”
Furthermore, several risks may come up and affect investors’ risk appetite, according to FXTM market analyst Han Tan:
“From signs that COVID-19 cases are making a resurgence globally to simmering U.S.-China tensions, amid the shifting expectations for the Fed’s policy outlook, the relative calm in markets could yet be upended by the realization of such risks.”
Other Factors
Besides the macroeconomic data, investors are also keeping an eye on the rhetoric from the US, global COVID-19 cases, and new stimulus announcements. ING economists said:
“With the ink on the $1.9tn fiscal relief plan barely dry, next week sees President Joe Biden push ahead with the $3tn Build Back Better green energy and infrastructure plan. The difficulty will be getting it passed by Congress, given the need for 60 Senators putting it forward for a vote … It may need to be broken up into smaller packages and diluted to some extent should Republicans put up stiff opposition. It is not going to be an easy sell.”
What comes next in the gold market?
