Gold Investors: This Needs To Be On Your Radar Next Week

New York (Nov 18)  While all eyes are on Washington, D.C. as tax talk winds through the Senate, some analysts are telling gold investors to pay attention to flattening bond-yield curves, which could be good for gold prices in the near-term.

According to some analysts, the flattening yield curve has not been on most investors' radar lately but could be one of the reasons why gold is testing the top end of its current range. December gold futures are seeing the first back-to-back weekly gains since September, rising to a four-week high. Prices last traded at $1,291.20 an ounce, up more than 1% since last Friday.

Rising gold prices are helping to lift the entire precious metals complex. Silver is seeing its first strong week in five weeks. December silver futures last traded at $17.155 an ounce, also up more than 1% on the week.

The yield-curve, the difference between short-term bonds like two-year and five-year notes and long-term bonds like 10-year and 30-year notes, have recently pushed to near-record lows, which according to gold analysts, is positive for the yellow metal because it reduces opportunity costs.

Bart Melek, head of commodity strategy at TD Securities, said the spread between five-year notes and 10-year notes has "completely collapsed in recent days." He added the aggregated yield curve, TDS' preferred measure, shows the curve near multi-year lows.

In this environment he said gold, while not expected to break out of above $1,300, should remain well supported in the near-term.

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said he is also watching the yield curve and agreed that its flattening is good for gold.

"I think the trend in the yield curve tells me that the economy is not doing as well as it appears," he said. "Investors are quietly moving into gold as uncertainty remains and that is supporting prices."

Lukman Otunuga, research analyst at FXTM, also see the falling yield curve supporting gold's safe-haven demand.

"Falling long-term yields may be one of the culprits that continue to support gold bulls. While bulls seem to be taking some control in the current tug-of-war, the victor this week will be determined by whether prices conclude above or below $1,280," he said.

Maxwell Gold, director of investment strategy at ETF Securities, said a flatter yield curve could create some volatility in equity markets, which would support gold, making its low opportunity costs attractive as a safe-haven asset.

Analysts are not expecting the trend in the yield curve to change anytime soon.

"The Federal Reserve is reducing its balance sheet, which is made up of mostly short-term issuances and that will push the short-end of the curve higher," said Melek.

The long-end of the curve will remain constrained as the Federal Reserve pursues its "lower for longer" interest rate policy, added Gold.

This Is How You Can Play The Gold Market

While a falling yield curve is supportive for gold, it is not expected this factor will push prices out of the current channel. Some analysts have noted the gold market is trading in its narrowest range in more than 3 years.

Some analysts are not expecting to see any significant move in gold until after the Federal Reserve's December monetary policy meeting.

"Once we see how aggressive the Fed will be in 2018 will give traders a better understanding of where the yield curve is heading," said Phillip Streible, senior analyst at RJO Futures.

Streible added that in the near-term, with gold stuck firmly with a range, he recommends using a butterfly options strategy.

In his strategy he said traders can sell $1,255 puts for a credit and then use that money to sell two call options at $1,305. The trader then buys one $1,290 call option and another $1,320 call option.

The maximum profit would be $15, representing the spread between the two outlying options and the midpoint. At the same time, the maximum loss would be the cost of the trade.

"You want a trade that has the cheapest initial outlay as there is a lack of confidence on the upside," he said.

Don't forget about Washington Turmoil

While a flattening yield curve will be supportive of gold, analysts also note the yellow metal will be sensitive to tax legislation discussions on Capitol Hill. The House of Representatives passed their version of tax reform and cuts, and attention now turns to the Senate as they push their bill forward.

Analysts note the Republican Senate, with its slim majority, can only afford to lose two votes on its tax legislation.

"I think the tax legislation is going to be an important factor for the U.S. dollar and in turn gold," said Gold.

Levels To Watch

Gold's strong close Friday provides some momentum for bullish investors. However, for most analysts the key level to watch is the October high at $1,308.40 an ounce. While the technical market has created higher lows, it still needs to create higher highs to confirm a new uptrend, according to some analysts.

"A move north of $1306 or a move below $1261, would be required for the metal to snap out of its current range," said David Madden, market analyst at CMC Markets.

Bill Baruch, president of Blue Line Futures, said he is looking for gold to test initial resistance at $1,292 an ounce.

"We need to see a close above that level to see a sustained push to $1,300," he said.

The Final Say

U.S. Markets will be more focused on the Thanksgiving holiday next week than economic data as there are only a few reports that will garner much attention. The highlights of the week include the minutes from the October Federal Reserve monetary policy meeting and durable goods data for October.

Federal Reserve Chair Janet Yellen will be speaking at an event at the New York University Stern School of Business. Markets will be sensitive to dovish comments ahead of December's interest rate decision.

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