The gold market is seeing its best weekly performance in more than a year and some analyst have said that the precious metal has enough momentum to break through critical long-term resistance in the near-term.
Disappointing employment growth in the U.S. has pushed gold prices back to within striking distance of the $1,350 level. August gold futures last traded at $1,347.10 an ounce, up 2.7% since Mei 31.
The latest rally comes after the U.S. Labor Bureau said that only 75,000 jobs were created last month. According to the consensus forecast, economists were expecting to see job gains around 177,000.
According to some analysts, the miss in employment data is adding fuel to calls already calling for aggressive action from the Federal Reserve.
Phillip Streible, senior market analyst at RJO Futures, noted that markets are pricing in a more than 70% chance of a rate cut by July.
"Gold has the ammunition it needs to make a powerful run higher," he said. "It is looking like gold will have enough momentum to reach $1,400 an ounce by year-end."
However, the optimistic outlook comes as gold faces some strong technical headwinds. Since hitting its 2015 low, the yellow metal has tested resistance around $1,350 eight times.
Bill Baruch, president of Blueline Futures, said that although historical charts highlights a difficult road for gold, investors can't ignore current market conditions.
"Though $1,350 is a big resistance level, I do think there is a different narrative that will push prices through this barrier," he said.
Baruch added that as long as markets are pricing in a rate cut, gold will continue to do well. He noted that bond yields bottomed out only after the Federal Reserve loosened monetary policy.
"It's like going on vacation, there is a lot of excitement before you leave and then when the holiday starts you realize that it will soon be over," he said.
U.S. Dollar No Longer A Headwind For Gold
Along with falling bond yields, gold is seeing renewed momentum from a significant side in the U.S. dollar.
The latest employment numbers were the latest blow to the U.S. dollar according to market analysts. The U.S. dollar index has fallen more than 1% last week, last trading at 96.52 points.
"Although the unemployment rate held at a 49-year low of 3.6%, the overall flavor of the report was quite sour and this continues to be reflected in the Dollar's valuation," said Lukman Otunuga, research analyst at FXTM. "Market speculation over the Federal Reserve cutting interest rates is set to intensify following underwhelming jobs report last week. With labor markets showing some cracks, and concerns rising over persistent trade tensions negatively impacting the U.S. economy, Dollar bears may take full control of the driver’s seat sooner than expected."
Looking at gold prices, Otunuga said that if gold sees a solid close above $1,350, then all eyes will be on $1,360 and $1,375 in the medium term.
Baruch also sees a lower path of least resistance for the U.S. dollar.
"There is a 20-year trend line in the U.S. dollar index at 101 and it has been in an ascending wedge pattern for the last six to eight months and that pattern is a bearish pattern," he said. "98 was a tremendous resistance level. If you have a long-term outlook for the U.S. dollar, then you should be extremely comfortable shorting the dollar at 98."
Is Gold Getting A Head Of Itself?
Although there is growing positive sentiment in the gold market, some analysts are warning that investors should be cautious at current levels.
Ole Hansen, head of commodity strategy at Saxo Bank, said interest rate cut expectations could start to work against gold in the near-term as loose monetary policy supports equity markets as well.
He noted that while gold is seeing its best week in a year, equity markets are seeing their best week since November.
"Fed Rate cut calls will start to benefit stock markets and that could prompt gold investors to take profits within this strong band of resistance between $1,360 and $1,390," he said. "Renewed stock market weakness will be needed to drive gold prices higher."
Hansen said that he is neutral on gold in the near-term.
"After the rally we have seen, I think the market is need of consolidation," he said. "But I wouldn't want to be bearish on this market."
Mexican Tariffs In The Spotlight This Week
Although markets will continue to digest Friday's weak employment data, they will also be paying close attention to geopolitical headlines. Today is the deadline President Donald Trump has given Mexico to stop people from illegally entering the U.S. from the southern border.
The threat of a 5% tariff on all Mexican goods has created a lot of fear in the marketplace as it would cause significant disruption to the North American supply chain. Trump has said that tariffs will start at 5% and could rise as high as 25% by October if Mexican authorities don’t stop the flow of illegal immigration.
"The initial 5% tariff on Mexican imports probably won't have a major impact on the economy unless it remains on pace for an extended period. But we estimate that a 25% tariff would subtract 0.3- 0.5%pts from GDP growth, with almost half of that coming from disruption to the autos sector," economists at Capital Economics said in a report last Friday.
However, if the Monday deadline comes and goes without the tariffs, analysts have said that it will have little impact on gold prices.
"The Mexican tariff issue doesn't really dent the broader picture of growing geopolitical uncertainty," Baruch said.
The Final Say
The U.S. economic calendar is relatively light this week, but there will be three significant reports that investors will be keeping an eye on.
Tuesday, markets will receive wholesale inflation data with the release of May's Producer Price Index. That report will be followed by data on the consumer front with May’s Consumer Price Index to be released Wednesday.
Disappointing numbers could solidify a rate cut in July, according to some economists.
The week ends with the release of May retail sales data. The health of U.S. consumers will play an essential role in determining the health of the overall economy.
Source: Kitco News