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Gold failed to breach the $1,850 an ounce level this week and another retreat below $1,800 could open the floodgates to more selling, analysts told Kitco News.
"Gold has underperformed in 2021 so far," said Walsh Trading co-director Sean Lusk. "The market has had a real hard time above $1,850-60. It is surprising in some way if you look at the performance of crypto."
Rising yields on U.S. Treasuries and stronger U.S. dollar have been weighing on gold, and unless there is a significant catalyst that flips these trends around, gold could continue to tread water.
"The 10-year bond moved up to almost 1.2%. As yields moved higher, it triggered buying in the dollar, which has taken an edge off gold," said Kitco Metals global trading director Peter Hug. "Short-term, people are parking some of their money in cash."
At the time of writing, April Comex gold futures were trading at $1,824.50, down 0.13% on the day.
The dollar is where the trade is, said LaSalle Futures Group senior market strategist Charlie Nedoss. "There is the perception that we will start to open up. And even though we do have big dollar shorts out there, the U.S. dollar index was seeing some strength around 90.70 level on Friday," he said.
The gold market is also still waiting on the Biden's administration to launch its stimulus program. Any further delays will continue to weigh on gold, noted Hug.
"There was some speculation that a few Democrats were not going to vote for this bill due to minimum wage increases. If they can't make that up on the Republican side, there will be a problem," Hug said. "The metals market has been anticipating for the stimulus to go through. Right now, it might be another question mark. And as anticipation dampens, people are taking profits in metals."
Risk of a drop to $1,700s
If gold is unable to hold the $1,800 level next week, there is a risk of investors liquidating their long positions, which could push prices into $1,705-10 territory — about 10% down on the year, Lusk said.
"A lot of longs in the market, and we are not seeing a continued uptrend here. Longer-term, these price dips will be bought, but who is to say that the market might not go for another 5% down from here," Lusk said. "The $1,705-10 level could be the next target down. Nothing would surprise me here. The ETF market has been seeing outflows already."
Resurgence to the upside might take a while, he added. It looks like gold can re-test the lows of $1,780-85 next week. "We must hold $1,780. If not, a lot of longs will be bailing."
Hug said he would be surprised if gold fell below $1,800 or broke out well above $1,850 next week. "I'm looking at $1,780-$1,850 rage next week. Initial support is $1,800."
Nedoss pointed out that gold is ready to test $1,800 an ounce as it trades below the averages right now.
In the long term, Lusk sees inflationary undertones winning the day and pulling gold upwards. "Physical and tangible assets will be favored. If you have an opportunity to get in below $1,800, it is a good buy," he said. "If Biden gets what he wants on the next aid package, how does it not create some underlying inflation in the future?"
'Hiatus in the physical market'
There also seems to be a pause in the physical gold market with high premiums weighing on demand, said Hug.
"Retail investors are becoming less enthusiastic about chasing premiums in both gold and silver. Premiums are high, and the amount of inventory that is available on a cash basis is anemic. There has been a hiatus in the physical buying market over the last few days," he explained.
The big unknown right now is with the U.S. product after the U.S. Mint stopped producing its American Buffalo coins. The Mint is also about to stop producing its one-ounce gold American Eagle coins with the old design.
"There is not a lot of new product for the next 4-6 weeks until the U.S. Mint starts producing its gold Eagles with the new design," Hug noted. "Whatever dealers have in their inventory right now, they are charging significant premiums."
Data to watch
Markets are paying close attention to the Federal Reserve (Fed) and the European Central Bank (ECB) meeting minutes, scheduled to be released on Wednesday and Thursday, respectively.
"Investors will focus on policy meeting minutes from the Fed and the ECB next week in search of hints that the first one has started discussing the timing of tapering and the second one is planning to thwart EUR strength," said ING FX strategists on Friday.
Other macro data on the radar are U.S. PPI, retail sales, and industrial production on Wednesday, as well as jobless claims on Thursday. Analysts are also eyeing N.Y. Empire State manufacturing index on Tuesday and the Philadelphia Fed manufacturing index on Thursday.
There will be a slate of U.S. housing data, including building permits and housing starts on Thursday and existing home sales on Friday. The U.S. markets will be closed on Monday for Presidents Day.
By Anna Golubova
For Kitco News
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