Patience has finally paid off for the gold bull, as demand for the precious metal has pushed prices to levels not seen in nearly six years.
Although gold prices are off their highs after breaking above $1,400, the market is still seeing its best weekly gains in more than three years. August gold futures last traded at $1,393.70 an ounce, up nearly 4% since the previous Friday.
According to it some analysts, gold's major breakout could be just the start of a long-awaited rally as investors adjust to shifting interest rate expectations. Gold saw most of its gains the previous week following the Federal Reserve’s monetary policy meeting, which opened the door to a rate cut as early as next month.
"I don't think you can be anything but bullish on gold in the near-term after this significant technical breakout," said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Cieszynski added that gold's focus on global interest rates is helping the market decouple from volatile day-to-day safe-haven flows. He noted that growing dovish monetary policy is coming from all major central banks.
"When central bankers start talking about the stimulus that is generally weak for currencies, and this sentiment doesn't just shift overnight. That is why I think gold's break out is particularly significant. It’s not on the news of the day; it's because of the shift in monetary policy."
Specifically, in the U.S., markets expect the Federal Reserve to cut interest rates as early as July with the growing expectation of a 50 basis point move, for the year markets are pricing in nearly four rate cuts.
U.S. Dollar Weakness Supports Higher Gold Prices
Although there is a lot of bullish sentiment in the marketplace, investors still need to keep an eye on the U.S. dollar, as this will continue to impact gold prices. The U.S. Dollar Index last week trading near a one-month low, pushing below critical support levels at 97 points.
Jasper Lawler, head of research at London Capital Group, said that he is a little concerned about the growing bearishness in the U.S. dollar. He explained that although markets are expecting the Federal Reserve to cut rates next month, they are still not as dovish as other central banks will be this year.
He added that the bearish bets on the U.S. dollar could reverse fairly quickly if central banks in Europe and Japan pursue more aggressively looser monetary policy. Both economies, he noted, are in worse shape than the U.S.
G20 Meeting Poses A Risk For Gold Market This Week
Although the idea of looser monetary policy is supporting gold prices above $1.400 an ounce, there is still a question of the timing of expected cuts; according to some analysts, this weekend Group of 20 meeting, a gathering of leaders and central bankers of the 20 largest countries in the world, could create some volatility in the marketplace.
Ole Hansen, head of commodity strategy at Saxo Bank said that any comments on a possible resolution to the ongoing trade war between U.S. and China could reduce gold’s safe-haven appeal and take some momentum away from its current rally.
However, he added that it is unlikely any material agreements will be made at the conference.
Christopher Vecchio, senior currency strategist at DailyFX.com, said any positive comments on trade from the G20 could shift the outlook on the global and U.S. economic growth, which could push the timing of rate hikes down the road.
"Right now markets are having to grapple with a wide disparity in interest rate expectations, right now the most likely outcome is that the Federal Reserve will cut rates by 50 basis points this year, but there is also another likely scenario where trade improves and the Fed leaves interest rates unchanged," he said. "With the first cut expected in July, we could see a good deal of volatility this summer."
Lukman Otunuga, research analyst at FXTM, also said that he will be watching headlines from the G20 meeting, which kicks off on June 27 in Japan.
"If the United States and China do find a resolution to the long-standing trade tensions, this will cause a rapid shift in the economic outlook and could even mean that the Federal Reserve throws the keys to lower U.S. interest rates out of the fast-moving car," said Otunuga in a recent report.
Gold Doesn't Need To Fear Record High Equity Market
Gold isn't the only market that is reacting positively to the latest dovish sentiment from global central banks. The S&P 500 is trading near records. According to some reports price action, this month, has been the seventh best June in the index's history.
However, analysts aren't worried about equity markets taking momentum away from the gold market. Lawler said that there is still too much uncertainty surging through financial markets.
"Although equities are rallying, investors still see value in holding a secure asset like gold," he said. "Even though the Fed has backstopped growth and is supporting equity markets, they haven't removed all the risk from the marketplace and that will help gold.
Hansen said that he doesn't think this is a great environment for equity markets because central banks are cutting interest rates to support slowing economic growth.
"The focus on lower growth and lower interest rates are potent factors for gold that will continue to drive gold prices higher," he said.
Otunuga also said that he is not worried about gold prices, even if equity markets continue to record fresh all-time highs.
"The precious metal remains heavily supported by Dollar weakness, uncertainty revolving around global trade developments and rising speculation over major central banks cutting interest rates," he said in an email comment to Kitco News. "For as long as these core themes remain present, Gold is positioned to be shielded from downside shocks."
Gold Needs To Hold This Support Level
Although analysts are optimistic on gold through the rest of the year, some also see this breakout as fragile until it tests critical downside support.
Vecchio said that the market appears a little frothing and he would not be surprised to see the market take a little breather in the near-term. He added that gold's uptrend is still in place as long as support holds at $1,360 an ounce.
Ole Hansen said that he is looking for gold prices to hold support between $1,355 and $1,375.
Lawler is looking at a wider support area for gold and remains bullish as long as prices hold above $1,300.
"It not surprising to see a larger correction in gold after a significant breakout like this," he said.
The Final Say
According to some analysts, markets are expected to tread water through most of the week, with traders unlikely to make big bets one way or another ahead of the G20 meeting.
However, some critical economic data could create some volatility in markets. Hansen added that investors will continue to watch data to determine the timing of the Federal Reserve’s expected rate hike; weaker economic data will continue to support a July move, he said.
The economic calendar starts on Tuesday with the release of U.S. consumer confidence data and new home sales numbers. Mid-week markets will get a glimpse of the health of the manufacturing sector with May durable goods orders. Markets will see the final reading of second-quarter GDP and pending home sales data on Thursday. Finally, the week ends with the release of relevant inflation data.
Source: Kitco News