Gold is trying to regain $1,850 / oz support and its next move will be crucial. If that level were breached, gold could climb to $1,925 an ounce, according to analysts.
After a strong start to December, gold has rebounded sharply after falling below $1,800 last week. Spot gold closed at $1,838.71 an ounce on Friday, up $52.58, or 2.94 percent, from a week earlier.
Gold has been supported this week by a weaker dollar, hopes of economic stimulus and a record single-day outbreak of COVID-19.
Peter Hug, head of trading at Kitco Metals Global, said whether gold could break above $1,850 next week was key to market attention.
“The $1,775 level was the bottom line of last week’s sell-off and we didn’t break through that level,” he said. From a macro point of view, the market is very constructive. From a technical point of view, it may be problematic to break through that level as the $1,850 proved to be strong support. Gold has tested it twice this week. Normally, it would test that level three times before breaking through.”
Hug said the sharp fall in gold prices last week was unjustified and that was why gold prices rose so much in the first week of December. “People may have taken profits and locked in capital gains because they expected Biden to raise taxes. But falling to this level is not justified. Once it falls below $1,800, automatic selling by computer programs pushes it even lower.”
Gold is trading above last week’s highs, which is very constructive, said Charlie Nedoss, senior market strategist at LaSalle Futures Group in New York.
“The $1,856 level is going to be an important number and we’re going to challenge that level next week. Once this barrier is breached, technical buying will start to pick up. We’ve also continued to see ETF selling this week, so that’s something to watch out for next week.”
The COVID-19 stimulus package is all eyes
Talks on economic stimulus will be central next week as markets were encouraged by bipartisan support for a $980bn coronavirus aid package. In addition, Democrats and Republicans face a December 11 deadline to pass a $1.4 trillion budget. If it does not pass, the government risks a shutdown.
“All the attention is on the Negotiations between Democrats and Republicans to come up with an economic stimulus plan by the end of the year,” Hug said. More liquidity in the market is good for both commodities and equities. “If they don’t come out with a stimulus package, we probably won’t see that until February, and that could have a negative impact on the stock market and the gold market as people move into cash.”
The situation in the United States is getting more difficult by the day. Analysts say this winter will continue to be difficult. They noted that novel Coronavirus infections will set a new high with 213,000 new cases and 2,500 deaths per day on Thursday.
Nedoss noted that job growth has slowed significantly and will only get worse before it gets better.
“Over the past seven months we have seen positive job growth but each month it is getting smaller,” he said. The jobs data added to pressure for a stimulus deal and for the government to stay open. If you put the two together, you have an incentive to do something.”
Nedoss also expects the dollar to weaken further, which should give gold a further boost.
Analysts said gold’s upward trajectory would include resistance at psychological levels of $1,850 and $1,900, followed by $1,925, with a breakout clearing the way to $1,975.
Hug added that it was “not out of the question” to reach $2,000 by the end of the year if the stimulus package is approved.
Not everyone is ready to ride the bull market, however, with Daniel Pavilonis, a senior commodities broker at RJO Futures, warning that selling may not be over yet.
“The market is exhausted. I wouldn’t be surprised to see a pullback next week. We are in the process of bottoming out. Gold could fall as low as $1,797.80 next week. If we close below that level, we could see further selling.”
Pavilonis explains that the positive news about vaccines is driving the bearish sentiment.
“There may not be complete agreement on the stimulus package,” he said. “They may postpone the problem until next year. With the vaccine news, the market sees a light at the end of the tunnel, and excessive stimulus is a thing of the past. If we look in that direction, the economy will start to pick up and the dollar will strengthen, which won’t bode well for metals.”
However, Pavilonis also noted that if gold continues to move higher next week, it could be “a critical period and if it closes much higher, gold will continue to move higher.”
Another thing market participants need to be aware of, he says, is the ‘extreme highs in the stock market.’ “We wouldn’t be surprised if there was a correction. At first, metals prices will go down, but then they will turn up.”
Pavilonis added that under those circumstances, gold won’t take long to hit $2,000.