Gold could be on the brink of another rally as it tops key resistance levels and moves towards $1,800 an ounce, according to analysts.
The precious metal is wrapping up its second consecutive week of gains after a positive start to Q2 amid a weaker U.S. dollar and retreating U.S. 10-year Treasury yields. At the time of writing, June Comex gold futures were trading at $1,779.90, up 2% on the week.
"The move in gold has been predominately driven by the U.S. dollar, which is continuing to drop. The dollar index is at 91.5 right now. Very important to note, we've seen a pretty significant decline from the 10-year yield and along the curve broadly. All of that has driven gold to the upside," TD Securities head of global strategy Bart Melek told Kitco News.
The momentum is definitely on gold's side right now, RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.
"If we can close above $1,815 next week, we have a good shot at a very momentous move again to the highs. Possibly continue gold's secular bull market," Pavilonis said. "Markets have calmed down a bit. We had so much pressure from the Federal Reserve and the European Central Bank trying to ease tensions in the yields, and it worked. And what they have been doing behind the scenes is also working, giving metals some reprieve."
The weaker U.S. dollar has finally allowed gold to step out of its tight trading range, said FXTM market analyst Han Tan. "The greenback's support has been eroded with 10-year Treasury yields moving below the psychologically important 1.60% mark, which in turn has allowed spot gold to break above its 50-day simple moving average for the first time since early February," Tan said.
Next weeks also marks the Federal Reserve media blackout period ahead of its monetary policy announcement on April 28. ING said that no additional Fed speakers could mean a weaker U.S. dollar, which is beneficial for gold. "A quieter week for U.S. data and the Fed in blackout period could favor a continuation of benign market trends and a slightly weaker USD," the ING strategists wrote.
There is no significant resistance for gold until the $1,800, said LaSalle Futures Group senior market strategist Charlie Nedoss. "The $1,809.40 is the 100-day moving average, and over time we will hit it."
It was key that the precious metal didn't close below $1,736.40 — this week's lows, Nedoss added. "A lot of this has been data-driven," he said.
The market is also recalibrating after pricing in too much inflation too soon, Melek explained.
"Inflation expectations have been a bit too rich, and they have been going down. It suggests that the market recalibrated its view. We've seen too much of an increase along the yield curve in its expectation of higher inflation, and now we are paring it back. Also, global economic concerns are playing a role as some countries who don't have a robust vaccine deployment plan could have a negative impact on the global recovery," he said.
In the meantime, the algorithmic community has been short on gold, but traders need to watch the $1,808 level for a change in that trend, Melek noted. "Prices just north of $1,800 would catalyze the covering of a significant portion of current CTA short positions."
However, it is too early to get too excited when it comes to gold's future price action, Melek warned. "We passed the 50-day moving average, the next level here is around north of $1,800."
Before moving much higher, there needs to be a confirmation that the rise in the U.S. 10-year Treasury yields is contained.
"The big battle here will be between the Fed and the market. The Fed is saying that any inflation will likely be transitory due to base effects, while the market might start to worry that they are behind the curve. We are still waiting for the Fed statement to tell us that they will stay put," Melek stated.
Data to watch
The European Central Bank (ECB) and the Bank of Canada (BoC) interest rate announcements are on the radar next week. They come just one week ahead of the Federal Reserve's April 27-28 monetary policy meeting.
"The ECB will look through any temporary increases in headline inflation and will not tolerate significant moves in bond yields unless they are the result of improved growth prospects. The bank's decision to front-load asset purchases at the last meeting was meant to cap the rise in yields, which have tracked moves in U.S. Treasuries," ING strategists said.
Markets will also be eyeing the latest U.S. jobless claims data and existing home sales, both due out on Thursday, as well as Friday's U.S. manufacturing PMI and new home sales.
Since the macro data will be quieter than usual next week, analysts are also carefully monitoring the progress of U.S. President Joe Biden's infrastructure plan.
"There is little sign of bi-partisanship on the $2tn package, and it seems that the Democrats are going to push it through the reconciliation process to avoid the need for 60 Senators to agree to put it to a vote. Nonetheless, not all Democrats are fully on board, meaning we could yet see changes to the package, especially surrounding the taxation part," said ING chief international economist James Knightley.
The precious metal is wrapping up its second consecutive week of gains after a positive start to Q2 amid a weaker U.S. dollar and retreating U.S. 10-year Treasury yields. At the time of writing, June Comex gold futures were trading at $1,779.90, up 2% on the week.
"The move in gold has been predominately driven by the U.S. dollar, which is continuing to drop. The dollar index is at 91.5 right now. Very important to note, we've seen a pretty significant decline from the 10-year yield and along the curve broadly. All of that has driven gold to the upside," TD Securities head of global strategy Bart Melek told Kitco News.
The momentum is definitely on gold's side right now, RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.
"If we can close above $1,815 next week, we have a good shot at a very momentous move again to the highs. Possibly continue gold's secular bull market," Pavilonis said. "Markets have calmed down a bit. We had so much pressure from the Federal Reserve and the European Central Bank trying to ease tensions in the yields, and it worked. And what they have been doing behind the scenes is also working, giving metals some reprieve."
The weaker U.S. dollar has finally allowed gold to step out of its tight trading range, said FXTM market analyst Han Tan. "The greenback's support has been eroded with 10-year Treasury yields moving below the psychologically important 1.60% mark, which in turn has allowed spot gold to break above its 50-day simple moving average for the first time since early February," Tan said.
Next weeks also marks the Federal Reserve media blackout period ahead of its monetary policy announcement on April 28. ING said that no additional Fed speakers could mean a weaker U.S. dollar, which is beneficial for gold. "A quieter week for U.S. data and the Fed in blackout period could favor a continuation of benign market trends and a slightly weaker USD," the ING strategists wrote.
There is no significant resistance for gold until the $1,800, said LaSalle Futures Group senior market strategist Charlie Nedoss. "The $1,809.40 is the 100-day moving average, and over time we will hit it."
It was key that the precious metal didn't close below $1,736.40 — this week's lows, Nedoss added. "A lot of this has been data-driven," he said.
The market is also recalibrating after pricing in too much inflation too soon, Melek explained.
"Inflation expectations have been a bit too rich, and they have been going down. It suggests that the market recalibrated its view. We've seen too much of an increase along the yield curve in its expectation of higher inflation, and now we are paring it back. Also, global economic concerns are playing a role as some countries who don't have a robust vaccine deployment plan could have a negative impact on the global recovery," he said.
In the meantime, the algorithmic community has been short on gold, but traders need to watch the $1,808 level for a change in that trend, Melek noted. "Prices just north of $1,800 would catalyze the covering of a significant portion of current CTA short positions."
However, it is too early to get too excited when it comes to gold's future price action, Melek warned. "We passed the 50-day moving average, the next level here is around north of $1,800."
Before moving much higher, there needs to be a confirmation that the rise in the U.S. 10-year Treasury yields is contained.
"The big battle here will be between the Fed and the market. The Fed is saying that any inflation will likely be transitory due to base effects, while the market might start to worry that they are behind the curve. We are still waiting for the Fed statement to tell us that they will stay put," Melek stated.
Data to watch
The European Central Bank (ECB) and the Bank of Canada (BoC) interest rate announcements are on the radar next week. They come just one week ahead of the Federal Reserve's April 27-28 monetary policy meeting.
"The ECB will look through any temporary increases in headline inflation and will not tolerate significant moves in bond yields unless they are the result of improved growth prospects. The bank's decision to front-load asset purchases at the last meeting was meant to cap the rise in yields, which have tracked moves in U.S. Treasuries," ING strategists said.
Markets will also be eyeing the latest U.S. jobless claims data and existing home sales, both due out on Thursday, as well as Friday's U.S. manufacturing PMI and new home sales.
Since the macro data will be quieter than usual next week, analysts are also carefully monitoring the progress of U.S. President Joe Biden's infrastructure plan.
"There is little sign of bi-partisanship on the $2tn package, and it seems that the Democrats are going to push it through the reconciliation process to avoid the need for 60 Senators to agree to put it to a vote. Nonetheless, not all Democrats are fully on board, meaning we could yet see changes to the package, especially surrounding the taxation part," said ING chief international economist James Knightley.