Gold Prices End The Week Above $1,300 But Can It Last?

New York (May 27)  Sentiment in the gold market appears to be shifting as prices hold on to critical support at $1,300 an ounce, bouncing off fresh five-month lows at the start of the week.

However, some analysts are not convinced that the yellow metal has found its bottom just yet as the market remains in a downtrend. Despite the push higher, prices have been unable to break above essential resistance points, ahead of next week’s shortened trading week.

Gold is ending the week with solid positive gains as markets digest the minutes from the May Federal Reserve’s monetary policy meeting, which showed that committee members support inflation moving past their 2% target in the near-term. Also helping gold prices is a resurgence in geopolitical uncertainty after President Donald Trump canceled the June 12 meeting with North Korea’s leader Kim Jong-un.

June gold futures sellted the week at $1,303.70 an ounce, up almost 1% from last Friday’s settlement.

While some optimism is creeping into the marketplace, some analysts have said that they need to see gold prices push through its 200-day moving average around $1,307 before the expect to see investors test the waters again in earnest. For others, gold remains in a clear downtrend until prices push above $1,325 an ounce, which is a crucial retracement level from the April high to this week’s low.

David Madden, market analyst at CMC Markets, said that it is difficult to get excited about gold as the market faces an expected rate hike in less than three weeks.

“The price action has been in a downward trend since mid-April and I don’t’ think we are going to see that materially shift any time soon,” he said.

Even after the Fed minutes, the CME FedWatch Tool shows markets are pricing in a 90% chance of a rate hike June 13, which analysts say is supporting the U.S. dollar even as bond yields push back below 3%.

U.S. Dollar Will Continue To Drive Gold Prices

Ole Hansen, head of commodity strategy at Saxo Bank said that he is bullish on gold in the near-term as the recent drop in U.S. 10-year bond yields below 3% could signal an end to the recent rally in the U.S. dollar.

“Bond bears are being squeezed right now and if yields fall further then it will start to limit U.S. dollar strength,” he said. “That will be positive for gold.”

He added that gold could also benefit from growing economic uncertainty in Europe.

“Gold prices in euros hit their highest level since September and this could help gold even in the face of a stronger U.S. dollar,” he said.

However, some analysts aren’t entirely convinced. Neil Melor, currency strategist at Bank of New York Mellon, said that they expect further strength in the U.S. dollar as cracks start to appear in the European economy.

“The downside potential for the euro is still significant,” he said. “If global interest rates continue to diverge -- if the U.S. is seen as the only game in town -- then I think you will continue to see a stronger U.S. dollar even if bond yields continue to go down.”

Gold Investors Need To Pay Attention To Wage Growth Next Week

But for Mellor, it’s not the U.S. dollar that is the most significant factor for gold. He said that he doesn’t see any potential for gold prices to push higher as inflation remains muted.

He noted that next week’s employment data, particularly the wage data, will be critical for gold going forward. If wages don’t show strong growth in May then inflation expectations will remain muted, he said.

“I felt there was a case for gold at the start of the year when central bankers were talking about a potential inflation overshoot, but right now I’m not sure. There is no inflation to speak of and it’s going in reverse in Japan and Europe,” he said.

Madden said that he is also looking at wage inflation as this not only impacts inflation but will indicate whether or not the U.S. economy will continue to grow.

“The U.S. economy is pretty much at full employment, so it doesn’t matter how many jobs are created,” he said. “What matters is whether people are making more money and are they spending it?’ he said.

While next week’s employment number won't impact a June rate hike, Madden said that disappointing wage data will affect expectations in September and December. He added that gold prices could benefit if investors cut back on their expectations for four rate hikes this year.

Levels To Watch

While some investors and traders are encouraged to see prices above $1,300 an ounce, Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he is not convinced the market will hold this level.

Not only has gold been unable to push above $1,307 an ounce, but he would need to see gold push above $1,325 to neutralize the current downtrend. He described gold’s recovery from its recent five-month low as “feeble.”

“Even though bond yields have come off their highs the U.S. dollar is still rising. That that will be a major headwind for gold,” he said.

On the downside, Cieszynski said that he could see gold dropping to a range between $1,250 and $1,260 in the near-term.

Meanwhile, in a recent report, commodity analysts at Scotiabank said that while positive momentum is building, sentiment in the gold market is still strongly bearish as prices remain below the 200-day moving average.

The Final Say

Next week starts on a quiet note as both London and American markets will be closed Monday. However, despite the shortened trading week, there is a full docket of economic news that gold traders will have to navigate.

Markets will receive important consumer confidence data for May the day after the long week, followed by private sector employment numbers and the second reading of first-quarter gross domestic product.

The major event of the week is on Friday with the release of the May U.S. nonfarm payrolls report and manufacturing sector data.

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