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The gold market is stuck in neutral and could remain there through the rest of the summer as U.S. economic data continues to support the Federal Reserve's monetary policy tightening bias; however, analysts say that near-term weakness could be seen as a buying opportunity as the market waits for a new spark to trigger a broader rally.
While the gold market has been fairly resilient, with December gold futures holding support around $1,950 an ounce, analysts said that the precious metal still faces a challenging environment, especially as short-term bond yields continue to yield around 5%.
The gold market is seeing its second week of sharp losses. December gold last traded at $1,946.50 an ounce, down 1.5% from last Friday.
"Gold has a lot of competition as a safe-haven asset as the idea of a soft landing in the U.S. economy grows as consensus," said Edward Moya, senior market analyst at OANDA. "The long-term interest in gold is there, but this is going to be a tough environment. Gold will struggle until we see a market risk event."
Ole Hansen, head of commodity Strategy at Saxo Bank, said he also sees gold prices struggling as opportunity costs for holding the precious metal continue to rise. He added that investors are frustrated with holding gold as they liquidate their positions and move into equity markets.
He said that with the U.S. economy remaining fairly resilient in the face of the Federal Reserve's aggressive rate hikes, there is no urgency for investors to get into gold. He added that the gold market is waiting for the right trigger, which could take some time.
Analysts note that markets remain laser-focused on economic data as the Federal Reserve keeps its options open and remains data-dependent. The problem for traders and investors is that the data is still not providing any clear guidance.
This past week's Consumer Price Index shows that inflation is still well above the Federal Reserve's 2% target and looking ahead, some analysts are not expecting U.S. retail sales numbers to provide any new insight into personal consumption.
Analysts also said that the minutes from the Federal Reserve's July monetary policy meeting are also unlikely to provide any solid guidance ahead of September's decision.
Analysts have said that U.S. economic data has to turn decisively negative before interest rate expectations start to shift.
"CPI is still too high for the Fed to be relaxed about inflation for now. Higher carry, and opportunity cost make it very expensive to hold bullion," said analysts at TD Securities. "With gold currently trading at around $1,914/oz, we think that gold runs below $1,900/oz support (fib/200dma) from here, should data remain firm and inflation edge higher due to energy. Longer-term, however, positioning and likely aggressive action on the easing front, once data turns convincingly negative, should catalyze a robust rally which could take the yellow metal into $2,100/oz territory in late 2023-early-2024."
Sean Lusk, co-director of commercial hedging at Walsh Trading, said that despite the near-term challenges for gold, weakness should be bought. He noted that gold still remains well supported in the long term.
Aside from the economic data, the bond market is something that analysts are keeping an eye on, as higher volatility could be the spark that ignites a broader rally. While the U.S. bond market is not expected to see an immediate collapse, analysts said they are looking for cracks.
"At some point, investors need to realize that the government is printing too much money and once they do, gold will rally," said Lusk.
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Hansen said that although the debt burden is not an immediate threat, it remains a significant reason why investors won't want to sell too much of their gold.
Concerns over U.S. debt levels started to grow after Fitch Ratings downgraded U.S. long-term debt. Those fears were sharpened this past week following a disappointing 30-year bond auction.
"This weak auction highlighted for the first time this week the structural issue that the market is struggling to absorb all the new debt sales/issuance," said Nicky Shiels, head of metals strategy at MKS PAMP. "At some point, the U.S. debt issue will matter for gold, but as long as the market plays for larger debt sales (read higher US yields), gold is just another proxy to short/sell.
Price levels to watch
Analysts note that the contango in the gold market, between December futures and spot prices, remains a risk in the marketplace. In this environment, some analysts have said that they expect futures markets will likely have to fall closer to spot prices as economic data has proven to be more resilient than expected, raising expectations that the U.S. will avoid a harsh recession this year.
Analysts have said that critical support in December gold futures comes in between $1,950 and $1,940. Michael Moore, the creator of Moore Analytics, said that gold is headed lower unless there is a decent break above $1,955.30 an ounce.
In the spot market, analysts are expecting gold to test support at around $1,900 an ounce, which also represents the market's 200-day moving average.
Next week's data:
Tuesday: U.S. Retail Sales, Empire State Manufacturing
Wednesday: U.S. Housing Starts and Building Permits, FOMC meeting minutes
Thursday: Weekly Jobless Claims, Philly Fed Survey
By
Neils Christensen
For Kitco News
