Gold Prices Forecast: Test of Key Support Area Likely
New York (July 9) Choppy trading is likely during the week ahead and there is the potential for a test of key support levels in the $1,180-$1,200 per ounce range as expectations of less accommodative global monetary policies continue.
Gold prices came under significant pressure during the week with a slide to 16-week lows just below $1,210 per ounce. The main selling pressure came from a sharp increase in global bond yields, which increased the opportunity cost of gold.
From a medium-term perspective, markets will be looking for further evidence on long-term holdings, which have been steadily declining over the past few weeks. Further declines would substantially increase the risk of further net selling pressure.
Congressional testimony from Fed Chair Yellen will be an important focus on Wednesday and Thursday, with markets looking for further evidence on likely trends in monetary policy over the second half of the year. Gold will be vulnerable to further selling pressure if Yellen maintains the commitment to gradual policy normalisation.
The US economic data will have a significant impact, although the most important data releases will be concentrated on Friday with the latest CPI and retail sales releases.
Gold prices will be vulnerable to significant selling pressure if there are strong reports for both retail sales and consumer prices. Weak data would provide significant relief to gold, especially if there is a slide in consumer prices for the month.
Gold will be more exposed to selling pressure if the Japanese yen continues to weaken against the US dollar.
Trends in global bond yields are likely to be the most important focus during the week after the sharp increase in yields during the past two weeks.
The damage was started by ECB President Draghi, who adopted a more hawkish tone, and there were also more hawkish remarks from Bank of England members.
A crucial element is the evidence that global banks sense that now is the time to move away from ultra-loose monetary policies and unorthodox monetary policies.
If this type of rhetoric continues during the week ahead, gold will be vulnerable to further selling pressure. Financial stability will also be an important element with evidence of increased central bank concerns over asset-price valuations and the risk of financial bubbles.
These concerns are certainly an important element in looking for a less accommodative monetary policy.
There will, however, be the risk of sharp downward pressure on equity markets as policy shifts and any rapid decline in stocks would trigger some defensive gold demand.
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