Warning to analysts: do not expect too much gold next week

(Kitco News) – Next week will be an endurance test for gold bulls, who are waiting to see if prices can hold above $ 1,400 an ounce in a week that should be relatively calm.

According to some analysts, an imminent rate cut at the end of the month would reinforce the yellow metal in the coming weeks, but there is no important factor on the horizon to change the fundamental context of the financial markets and give a new impetus to investment. market. the precious metal.

"It was a roller coaster week for gold, so it's not surprising that some investors are reaping profits," said Ole Hansen, product strategy manager for Saxo Bank.

The gold market is posting decent gains for the week, with prices hovering above critical psychological support at $ 1,400 an ounce. Gold gained interest in the middle of the week after Jerome Powell, chairman of the Federal Reserve, presented a six-monthly press conference to Congress confirming a July 31 rate cut. Friday.

However, analysts said the gold rebound was now taking into account the drop in July rates and that the market needed new information to further strengthen the leg in the near term. Hansen added that investors should not expect to see much action over the next few weeks as the summer trading season approaches.

Due to the low activity of the market, it is expected that the short term profit taking weighs on the gold.

"The reasons for keeping gold are not gone, but I think we could start seeing signs of nervousness in the market as the price struggles to reach a new high," he said. . "If I sell, it's not for short selling, but I'm selling to reduce my exposure to neutral."

Colin Cieszynski, senior market strategist at SIA Wealth Management, said that gold prices had posted substantial gains recently. It is therefore not surprising to see the market move into a consolidation phase.

He added that the uptrend still remains in place even if the rally slowed in the coming weeks.

Everything revolves around the Fed … again

While Powell reported that the US central bank was ready to cut interest rates to support the US economy, some market expectations are starting to change, namely whether the July cutoff will be a unilateral move or the beginning of a new cycle of easing. .

In a recent interview, KC Chang, a precious metals analyst at IHS Markit, said he sees the July move as a "reduction in insurance" aimed at providing a little more fuel to an already robust US economy.

The FedWatch Tool WEC shows that the markets expect a probability of more than 75 basis points for a movement of 25 basis points and 24.5% for a movement of 50 basis points on July 31st. The markets are still forecasting three rate hikes at the end of the year.

Bill Baruch, president of Blue Line Futures, said bond yields were rising as markets reduced the Fed's monetary policy measures.

Cieszynski said predictions of aggressive monetary policy may depend on the Q2 earnings season, which will start next week with Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan, all on the income statement.

He added that due to slowing global growth, he expected a disappointing earnings season.

The United States is strong, but it can not withstand a global slowdown

The US economy remains relatively healthy, but Daniel Ghali, commodities strategist at TD Securities, said the issue that was of great concern to investors was whether the US could be an island in a sea of ​​slow growth. scenario he considered improbable.

Powell said the uncertainty of global growth was one of the biggest factors weighing on the growth potential of the United States.

"Global growth is not only slowing down, it has contracted in some countries and it will ultimately have a big impact on the United States," he said.

Singapore is a country that attracts much attention from market watchers. The country's economy is highly dependent on trade. On Friday, government data revealed that its national economy was down 3.4% year-on-year, the worst quarter-on-quarter performance since 2012.

"We are comfortable with prices staying above $ 1,400 an ounce as markets await further updates from the Fed after the July meeting," Ghali said.

Debt is also a growing problem

Sluggish global growth should continue to dampen investor sentiment, but analysts also warn that geopolitical uncertainties are also a factor to watch.

"With trade tensions dominating the debate in recent months, concerns over the need to raise the debt ceiling have been sidelined, but all this has changed this week, with a report suggesting that the ceiling for debt should be raised early in September months earlier than expected, "economists said Capital Economics. "It should be a relatively simple task for Congress to agree on a two-year spending agreement that would also raise the debt ceiling.But anything could happen in acrimony between Democrats and President."

Friday, Treasury Secretary Steven Mnuchin, warned that the US government could be short of money by September if Congress did not raise the debt ceiling before the suspension of August.

"We are modeling different scenarios for the monetary projections, and according to updated projections, there is a scenario in which we run out of money in early September, before resuming the work of Congress," wrote Mnuchin in a letter to the President of the House, Nancy Pelosi.

During his testimony, Powell warned that the US deficit was on an unsustainable trajectory. However, he added that Congress must raise the debt ceiling quickly so that the country can meet its obligations.

"Not raising the debt ceiling is unthinkable," he said. "The Fed can not protect the economy if the debt ceiling is not raised."

Record stocks without risk for gold

Some market analysts have said that gold may be struggling next week, as investors focus more on stock markets that are breaking records with the kickoff of the earnings season.

Hansen, however, said investors were unaware of gold in the near term as the two markets rallied for the same reason: a loose monetary policy.

Both the S & P 500 and the Dow Jones Industrial Average hit a record this week after Powell's comments.

"I think gold could be a bit lower if investors are looking for dividend paying stocks, but they will also turn to gold to protect their portfolios," Hansen said. "However, for gold to really shine, stock markets have to slow down."

The last word

The release of retail sales next week will attract investor attention as consumer spending is an important source of growth for the US economy. Economists note that weaker-than-expected data could strengthen the Fed's call for aggressive interest rate cuts.

"We estimate that retail sales were little changed in June, but this would remain consistent with a recovery in real consumption growth above 3% annualized in the second quarter," said economists Capital Economics.

In addition to retail sales, the markets will receive regional data on the opinion of the manufacturing sector, as well as figures on housing construction.