US Economic Data, Weaker US Dollar Key Factors For Gold Price

New York (Aug 12)  It’s becoming a cliché but investors need to pay attention to U.S. economic data as that will determine bond prices, U.S. dollar strength and gold prices, according to analysts.

A surprising drop in July retail sales data on Friday woke up sleepy gold investors, as the market saw its biggest move in what was a relatively quiet week. However, those gains have proved to be fleeting as December gold futures are now only showing modest gains for the week, last trading at $1,343.20 an ounce, up 0.15% on the week.

Although down from its session highs, silver outperformed gold this week. September Comex silver futures last traded at $19.835 an ounce, up 1.5% on the week.

The economic calendar picks next week with the highlight being the minutes of the July Federal Open Market Committee (FOMC) meeting. Simona Gambarini, commodity economist at Capital Economics, said that gold could get a boost if the minutes show the Federal Reserve is hesitant to raise interest rates later this year.

Bill Baruch, senior commodity broker at iiTrader.com, agreed that weaker data could be the factor that helps gold push through major resistance levels, making its way close to the $1,400 target.

“Gold is waiting to see if the U.S. dollar index will break support at 95 and I think that will happen if we get more disappointing data that supports a delay in interest-rate hikes,” he said.

Market Expectations For A Rate Hike

According the CME 30-day Fed fund futures, expectations are relatively stable in the near term with markets only pricing in a 12% chance that the U.S. central bank will hike rates in either September or November.

However, Friday’s weaker economic data has caused expectations for a December rate hike to fall. Currently markets see a 38% chance of a rate hike by the end of the year, down significantly from 52% priced in Thursday.

Expectations in early 2017 have also dropped, with markets pricing in a 42% chance for a rate hike in February, down from 52% priced in Thursday. For March, Fed funds are pricing in a 47% chance the Fed pulls the trigger, down from 59% seen Thursday.

Analysts have noted that the Fed has never hiked interest rates when markets have priced in a less than 50% chance of a move.

Gold In A Holding Pattern

Gold has been stuck about a $50 range since hitting a more than two-year high in early July, but according to Colin Cieszynski, chief market strategist at CMC Markets, the important factor to watch the overall trend.

“I am still very bullish on gold even though we have entered a short-term consolidation period,” he said. “The chart is forming a step-up pattern making higher lows, and all momentum indicators are green.”

Cieszynski added that he is also watching the U.S. dollar as it will be an important driver for gold in the near term.

“I think we should start to see a softer U.S. dollar now that interest-rate expectations have been pushed down for the year. I think we could still see one rate hike later this year but that won’t help the U.S. dollar in the near term,” he said.

Don’t Forget About Equity Markets

While some analysts are focusing on the U.S. dollar, Phillip Streible, senior market analyst at RJO Futures, said that he is also watching equity markets.

In this past week all three major U.S. indices hit record highs and he said that for gold to really push higher, this trend needs to change.

“Right now foreign funds are flowing into U.S. equity markets because they still want that exposure,” he said. “They are looking for higher yields.”

Although Streible is bullish on gold, he added that there is not much that could derail the currently equity rally.

“Good data is going to encourage foreign funds to buy U.S. equities on expectations that the economy will continue to grow. Bad data is going to encourage investors to buy equities because the Fed will be forced to leave interest rates unchanged, pumping continued liquidity into the market,” he said.

Trade Of the Week

Despite the hurdle created from a red-hot equity market, Streible gives us our trade of the week, which is another options market bull call spread. He is recommending buying one December 1400 call option at $27 and at the same time sell one 1425 call option for $20. The break-even for this trade is at $1,407.

 Maximum profit (the difference between the strike price between the short call and the long call minus the premium between the two options) would be $18, or $1,800 as a one-dollar move equals $100 in futures markets.

The maximum lost (the premium between the costs of the two options) is about $7, which equals $700.

Levels to watch

The one downside for gold next week is that it is up against major resistance.

Cieszynski said that gold needs to break above $1,375 to signal a new uptrend. Baruch noted that the market needs to close above $1,377.50, the July two-year high, to attract new buyers to the marketplace.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he thinks the market looking a little fatigued and is expecting to see lower prices next week. However he noted that global negative interest rates will keep the market well supported.

“Gold will hold support because where else can you put your money,” he said.

Hansen said that his first support level to watch will be around $1,320 an ounce, which represents the 50% retracement level since the rally following the Brexit vote. A break of that level could lead to a test of $1,298 level, which is the 61.8% retracement level.

“A push below that level could cause gold to give up all of its Brexit gains,” he said.

The Final Say

While markets will be anxious to gauge the tone Fed through its July minutes, the economic calendar picks up a little with the release of July’s U.S. Consumer Price Index and regional manufacturing data.
 St. Louis Fed President James Bullard will speak next week on the U.S. economy and monetary policy, which could impact market expectations.

Source: KitcoNews