(Kitco News) Gold is looking at the second month of losses in 2021, as markets close in February, and analysts are warning of more negative action by testing critical support levels for precious metals.
After the start of the year at around $ 1,912, the precious metal hit an eight-month low of $ 1,714 on Friday – down nearly $ 200 from the beginning of the year.
And if the price of gold fails to hold $ 1,725 or $ 1,700 next week, the sale may not be over, analysts told Kitco News. At the time of writing, April Comex gold futures were trading at $ 1,729.10, down 2.61% on that day.
“Gold went through the last lows and all weekly averages,” said Charlie Nedoss, senior market strategist at LaSalle Futures Group. “We could test $ 1,700 next week.”
The main downside triggers for gold were 10-year US Treasury yields, which hit a one-year high of 1.6% overnight and a stronger US dollar.
Friday’s sell-off was also accelerated by technical sales, after the metal fell below the 200-day moving average, said Kitco Metals global trading director Peter Hug.
“Right now, you have computer sales accelerating the movement below,” Hug said. “When we spoke last Friday, we were looking for an upward move in gold. But when we reached $ 1,817 on Monday, the 10-year yield was around 1.20%, now it’s north of 1.50%.”
This advance is important compared to the increase in yields from other countries, Hug pointed out. “It’s significant in the sense that European and Japanese rates are still at zero. You have to compare yields between countries. That’s why you’d expect the dollar to be stronger than where it is now, based on rising yields.” . he explained.
Investors are also starting to leave stocks and turn to cash, which is bad for gold, Hug added. “In the context of equity markets, they are starting to take on the chin with higher returns. Some people come out of the equity market and switch to cash. That’s why you have a weakness in commodities,” he said.
Next week, the $ 1,660 level is very much a possibility, said Bart Melek, head of global strategy at TD Securities.
Markets are more optimistic, Melek said, indicating the progress of the stimulus and faster-than-expected implementation of the vaccine. The growing concern now is stimulus money that accelerates inflation and intensifies the yield curve.
Fed, yields and inflation
Until the Federal Reserve can successfully assure markets that rates will not rise sooner than expected and may even signal that it could consider controlling the yield curve, anxiety will persist.
“As long as there is this ambiguity, they can say that they will allow inflation to ignite, but as long as the curve gets worse, gold will have to worry that the Fed is not engaging in its ultra-free policy,” Melek said. . “That’s why gold could sit even lower before it jumps higher.”
Shares are starting to decline every time yields rise as investors worry that the Fed is not underestimating inflation.
“If US Treasury Secretary Janet Yellen or Fed Chairman Jerome Powell come out and may even hint at higher inflation expectations and say they will keep yields low, gold will take off,” said RJO Futures senior broker Daniel Pavilonis. “But yields may need to rise to 2% before any response from the Fed.”
The Biden administration wants to continue to see light monetary policy, more stimulus and a strong stock market. “But the more stimuli they get, the higher the yields. They have to admit the problem and continue with the stimulus,” Pavilonis noted.
In the longer term, it is a completely different story, as the US economy will have to deal with massive dislocations in terms of closing businesses, which require low interest rates.
“Finally, we should see gold better, especially with record debt, and the capital market is a sense of risk,” Melek said. “Once we establish ourselves and it becomes obvious that the US economy is not so wonderful, there will be a return of gold. The market will come to this idea and gold will start to grow. We could see this at the beginning of the second quarter. “
Data to follow
There are a number of Fed speakers to watch next week, especially as analysts wonder if the Fed will address the sharp rise in yields.
“The week will see a whole series of Fed speakers, including Fed Chair Powell, giving the Fed the opportunity to slow the Treasury’s decline, at least by beginning to express some concern – which has been particularly lacking so far,” they said. ING FX strategies.
The Fed’s Powell is scheduled to speak about the US economy on Thursday at the Wall Street Journal Summit. The event will be broadcast live.
In terms of macro data, there will be US ISM-producing PMI on Monday, change in non-agricultural ADP and non-production ISM jobs on Wednesday, jobless claims and factory orders on Thursday, and the biggest event of the week – non-agricultural wages on Friday.
The market consensus calls for the February employment report to show an increase of 165,000 jobs and for the unemployment rate to remain at 6.3%.
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