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Gold ran into "massive resistance" at the $1,800 an ounce level, triggering a $30 retreat Friday. And analysts say that gold won't commit to a rally until there is enough interest to take gold past its key technical barriers.
Weighing on gold was a better-than-expected economic outlook following strong retail sales, with December Comex gold futures tumbling to $1,769 an ounce, down 1.61% on the day.
The move down canceled out gold's mid-week rally to $1,801, which was triggered by hot inflation data that showed price pressures rising 5.4% year-over-year in September, matching the largest annual price gain since 2008.
Keeping gold down were higher U.S. Treasury yields, expectations of a more aggressive Federal Reserve, and risk-on mood in equities, Blue Line Futures chief market strategist Phillip Streible told Kitco News.
"Gold ran into massive resistance. Federal Reserve's funds rates models indicate a hike next year around November. There's taper talk, yields are up, and equities risk is back on. Other commodities are much better inflation plays. Cotton and copper are breaking out," Streible said. “Gold has so much overhead resistance at $1,800, $1,805, $1,815, etc. The critical level to hold is $1,750. If we break there, then we could see $1,720 and $1,685."
Bitcoin hitting $60,000 and nearing its all-time highs for the first time in six months was also adding pressure, with gold continuing to compete with the popular cryptocurrency as an inflation hedge asset.
"Bitcoin is going to get a lot of attention. Bitcoin became a dagger in gold's side when it started to get more publicity. For gold to do better, you need growth to stall more," Streible explained.
Many analysts watching the gold space remain quite optimistic despite gold's setbacks, noting that demand for gold will come.
"It was always going to be tricky for gold to get above $1,800. But this dip is a buying opportunity. Fear is building up, and a lot of people are looking for safety. Gold, crypto, and Treasuries are usually where they will go. I see gold north of $1,800 next week. This is based on inflation scares as well as supply chain issues," said RJO Futures senior commodities broker Bob Haberkorn.
Gold will learn to coexist with bitcoin, Haberkorn added. "Bitcoin looks shinier right now, but at the end of the day, gold is gold."
One of the bigger obstacles the precious metal is fighting against is market expectations that the Federal Reserve will be more aggressive when it comes to tapering its bond purchases and raising rates.
"Gold traders know that there are rate hikes coming. This is why it has been sitting sub $1,800 for so long. But rate hikes that will come will be minimal. With all the U.S. debt, Fed is not in a position to start aggressively raising rates," Haberkorn said.
Gold's technical issues
Much of the angst happening in gold right now can be attributed to technical developments, said TD Securities head of global strategy Bart Melek. Gold is reacting to retail sales advancing. There is the expectations of a more active Fed.
"The important thing, technically speaking, we didn't go past $1,800. Gold rose just above $1,796, which is the 200-day moving average but failed to clear it. And that gave people a license to sell again," Melek described. "This is a combination of failure to convincingly move above the key technical level and the yield curve steepening up, with 10-year yields rising. The U.S. dollar also bounced up."
Price levels to watch
Melek added that gold could breach $1,800 an ounce soon. But first, the market needs to understand that the Fed can't raise rates too high.
"The Fed is comfortable to have real rates where they are, and it is comfortable to have inflation at current levels," he said. "Market needs to believe the Fed will not tighten. The view now is that the Fed will respond to inflation pressures. But taper is one thing, and pulling the trigger on rate hikes as early as next year is another."
Data next week
Monday: capacity utilization rate, industrial production
Tuesday: building permits, housing starts
Thursday: jobless claims, Philadelphia Fed manufacturing index, existing home sales
Friday: manufacturing PMI
By Anna Golubova
For Kitco News
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