As a volatile year draws to a close, gold appears to be gearing up for a year-end rally on bets that more stimulus measures will be introduced next week, analysts told Kitco News.
Gold had tried to break through the key psychological barrier of $1,900 an ounce this week, but stabilised just below that level on Friday. COMEX gold futures for February delivery ended down 0.1 percent at $1,888.90 an ounce, up about 2.5 percent for the week.
Gold rallied nearly $70 this week as Federal Reserve Chairman Colin Powell stressed that the central bank would continue its asset purchase program until “the job is done and really done.”
Mr Powell added: “We do have the flexibility to provide more accommodation. The problem is getting through the next 4-6 months. Obviously, help is needed there.”
Peter Hug, head of global trading at Kitco Metals, said gold’s target of hitting $1,925 by Christmas was still within reach.
“Powell made it very clear that they were going to act and he didn’t expect any sort of austerity until 2023. That means the Fed will have an easy monetary policy and a flexible inflation target for at least two years, “Hug said on Friday.
Until the global economy begins to normalize in the third quarter of next year, Hug believes the outlook for gold remains very constructive.
“From a fiscal and central bank point of view, they are going to keep easing, which is going to inflate the deficit and hurt the dollar,” he said. In that case, you have to be constructive with precious metals, “says Hug.
Daniel Ghali, commodity strategist at TD Securities, said there were two key underlying factors that would support higher gold prices next week.
“We think gold is trading at a low price relative to real interest rates and the precious metal will catch up. At the same time, the immediate driver of higher prices has to do with CFTC buying, which is a response to increased upward momentum, “Ghali said. “The Fed’s decision to link QE to economic outcomes remains supportive of the view that growth and inflation are excessive, which should provide macro positive for gold in the longer term.”
Us economic stimulus and Brexit
The two key events on next week’s agenda are fiscal stimulus in the US and Brexit.
“Investors remain focused on whether European politicians can push for a Brexit deal and whether the US Congress can avoid a government shutdown,” said CURRENCY strategist at ING. “We would prefer to make progress on both and maintain this year’s weak dollar environment.”
Congress has just a few hours left to avert a government shutdown and finalize a $900 billion coronavirus rescue plan. Federal funding expires at 12:01 a.m. Est on Saturday.
“By the end of the week we will know if the stimulus package will be implemented,” Hug said. Markets are already pricing in a $900 billion stimulus package. If the result is disappointing, there will be news.”
“Another item on the agenda is the Brexit negotiations. There is now a greater than 50 per cent chance that the UK will leave the EU without a trade deal, which will be good for the metals market next week, “he added.
Hug explained that a no deal Brexit would create fear and uncertainty and push the gold price higher. “There could be financial chaos between London and Europe. It will cause panic and Europeans will buy gold instead.”
Hug expects gold to meet resistance at $1,900 next week and may try to reach $1,925.
Ghali will keep a close eye on the $1,920 mark next week, which he described as a “necessary bottom line level” that needs to be breached before the consolidation period ends. On the downside, he is optimistic the dollar can hold on to its $1,850 level.
“Algo is looking for gold to stay above $1,880 an ounce to sustain buying. Gold investors are also looking to break out of the $1,920 / oz range, which would technically mean the end of the consolidation period. Given the relative cheapness of gold and the ongoing algorithmic buying flow, we may soon see a breakthrough, “he said.
Charlie Nedoss, senior market strategist at LaSalle Futures Group in New York, stressed a strong resistance level at $1914 next week. Nedoss also noted that if gold falls below $1,877 next week, it will be on the defensive.
Data to focus on next week
On the data front, the market will be closely watching U.S. third-quarter GDP data on Tuesday. Existing home sales are due on Tuesday, and home price indices and new home sales are due on Wednesday.
Economists will also be looking at THE PCE price index and personal spending on Wednesday, as well as initial jobless claims and durable goods orders on Thursday.
“The data coming out will include personal spending, which is likely to be weak given the weak retail sales figures but the manufacturing data suggest durable goods will be relatively firm,” said James Knightley, chief international economist at ING.