Can Gold Hold Above $1,300 Next Week?

(August 18, 2017 - by Anna Golubova, Kitco News)

While some consolidation is inevitable following gold’s breach of the key psychological $1,300 level Friday, analysts wonder if the current rally can be turned into a sustainable price range.

Gold saw significant support in a risk-off trading environment on Friday, with prices touching a 2.5-month high.

Analysts pointed to safe-haven demand following a terror attack in Spain, which killed 13 people, as well as uncertainty surrounding the future of Donald Trump’s administration.

One of gold’s top fundamental supporters has been a weak U.S. dollar, Fawad Razaqzada, technical analyst with Forex.com, told Kitco News. He added that if gold keeps its $1,300 level by Friday’s close, then the metal could go a lot higher next week.

Additional risk aversion next week could boost gold, according to the analyst. “Equity markets saw a sharp decline this week. If we see more of that, safe-haven demand would support gold,” he said. “Risk-on/risk-off trading environment is what we will be watching.”

Ken Morrison, editor of the newsletter Morrison on the Markets, also sees gold rising next week. “Eased tensions with North Korea have been replaced by open tensions within the White House, raising concerns they will stand in the way of important policy advancements if not a departure of White House staff important to keeping the focus on the agenda,” Morrison said. “My top end range next week is at $1,320 and possibly $1,335.”

Triggers To Watch

Some of the events worth highlighting include possible rekindling of the North Korea situation, which has been off the radar this week. Also, more tragic news surrounding terrorist attacks could trigger another rally, Razaqzada noted.

Next week’s Jackson Hole Policy Conference, which gathers central bankers from around the world to discuss common problems, is also an interesting event to keep an eye on.

But, Robin Bhar, head of metals research at Société Générale, warned that the annual gathering is usually just “theory and philosophy, rather than an occasion to announce anything significant.”

Fed Chair Janet Yellen’s speech at the event on Friday will be one of the highlights, noted Capital Economics’ Paul Ashworth, adding that she could hint that the Fed might announce the start of balance sheet normalization at its September meeting. The economist added that this “outcome is by now almost universally expected.”

Analysts also highlighted next week’s U.S.-South Korea military exercises as a possible driver for gold.

“I am bullish on gold for next week. It’s going to be an active week. Early in the week, the solar eclipse and the potential North Korea could do something around US-SK military exercises, which could keep gold active. A seasonal shift out of stocks and a seasonally favorable time of the year for gold may also have an impact,” said Colin Cieszynski, chief market strategist at CMC Markets.

Some Consolidation In Order

Bhar’s short-term outlook for gold is not as upbeat, forecasting some consolidation and sideways movement for the precious metal. The outlook remains “dependent on economic data out of the U.S. and any Fed commentary on interest rates and balance sheet reduction.”

For Bhar, the upside looks limited because central banks are still planning to reduce monetary stimulus in the U.S. and the eurozone.

Bart Melek, head of global strategy at TD Securities, seems to be on the same page, projecting a slight correction for gold, which might trade just below $1,300 next week.

“Gold can certainly correct down to $1,293 and trade between $1,300 and $1,255 next week,” Melek said. “Despite geopolitics helping things along, I don’t think the disturbances will be permanent and the market will be back talking about the Fed and economic data.”

What It Takes For a Sustainable Rally

In order to trade above $1,300 sustainably, the gold market will need to see a shift in Fed rhetoric or experience a geopolitical event that will have a permanent impact on equity markets, Melek said.

“Ultimately the Fed policy would have to tilt and point toward staying put for a while. The way it looks now is that the Fed, although a bit more dovish than expected, still plans to hike rates in December and announce unwinding of the balance sheet in September,” Melek added. “We would need to see some pretty nasty data that would prompt us to think that the Fed is unlikely to hike rates. Otherwise, gold will continue to trade in a range just below $1,300.”

Once breached, however, the new key psychological level would become $1,400, Kitco’s senior technical analyst Jim Wyckoff said.

“The next upside price objective for the empowered gold market bulls is pushing prices above longer-term chart resistance at the 2016 high of $1,378.00. Above that level is psychological resistance at the $1,400.00 mark. If $1,400.00 is penetrated on the upside, then there is not much, technically, to stop gold from fairly quickly reaching the $1,500 price level,” he wrote in a special gold report published Friday.

Key Data Next Week

Investors will be eyeing U.S. durable goods orders from July, scheduled to be released on Friday as well as new and existing home sales from July, expected to be out on Wednesday and Thursday, respectively. Other releases include services and manufacturing PMI data on Wednesday.