Gold investors can finally breathe a sigh of relief as prices have broken resistance at $1,800 an ounce and some analysts see the potential for higher prices.
June gold futures last traded at $1,815.80 an ounce, up 1.77% on the day.
According to analysts, growing inflation concerns pushing real bond yields to their lowest point since mid-February has ignited a spark in the gold market. Bark Melek, head of commodity strategy at TD Securities, noted that because of rising inflation pressures, the 10-year breakeven rate rates higher, which is also taking its toll on the U.S. dollar.
He added that rising inflation helped push gold prices above $1,800 an ounce. That initiated some technical buying as buy stops and sell stops were triggered.
Although gold has made a solid move above a vital resistance point, Melek said that more work has to be done to sustain the new momentum.
“In this environment, we are never completely out of the woods, but we are setting up for a nice little rally as momentum picks up,” he said.
While the breakout is good news for frustrated gold investors, Robin Bhar, an independent market analyst, said that he would like to see the precious metal hold these gains through Friday. He added that this move has helped to solidify the growing bullish momentum in the marketplace as investors look for important hedges against inflation.
“The technical and fundamental improvements we have seen in gold lately are signs of better times ahead,” he said. “With all the stimulus that is expected to come through, I can see why this narrative of more debt and higher inflation will continue to underpin and even drive gold prices higher.”
Bhar added that the next major hurdle for gold will be for prices to push above their 200-day moving average, which currently comes in around $1,868 an ounce.
Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he thinks gold has a lot more room to move higher; he described the precious metal’s price action as a solid breakout.
“I like what I am seeing in gold,” he said. “It’s not overbought and it is building up some pretty good momentum. We are also seeing silver prices push significantly higher, so this is just a good day for the precious metals.”
Cieszynski said that he would like to see gold prices hold support above $1,800 an ounce and then take a run to $1,850 an ounce.
Bill Baruch, president of Blue Line Futures, said that the move through $1,800 has repaired the technical damage inflicted when prices broke below $1,750. While he is optimistic that gold prices can move higher, he added that there is strong resistance between $1,830 and $1,850.
“I think if we can get back above $1,850, then we could be on our way to new highs again,” he said.
Gold doesn’t have to fear Friday’s nonfarm payrolls report
While inflation fears are propelling gold prices higher, some analysts note that improving economic data will continue to be a headwind for the precious metal. The most significant event risk comes on Friday with the release of April’s nonfarm payroll report.
According to consensus estimates, economists are expecting that the U.S. economy created nearly one million jobs.
Although the labor market is expected to improve, analysts have said April’s jobs report will not shift expectations that the Federal Reserve will maintain its ultra-accommodative monetary policy for the foreseeable future.
“The Fed will want to run the economy hot and that will change when it changes. Frankly, I don’t think even the Fed knows the timing. For now, print, print, print, spending, spend, spend will be the modus operandi,” Melek said.
Bhar also said that he doesn’t think April’s print impact the gold market’s new momentum.
“Powell recently said that there is still a long way to go before the economy reaches full employment and one report is not going to change that,” he said.
Cieszynski said that gold could get a boost Friday morning if the data fails to meet expectations. He added that there is a lot of optimism surging through financial markets and that could sour quickly if employment doesn’t meet the higher bar that has been set.
Although Baruch is optimistic on gold in the near term, he said that Federal Reserve monetary policy remains a significant risk. Although Friday’s employment data is not going to change current policies, he added that it could be the first domino to fall.
Baruch added that he is buying gold put options to hedge is bullish bets.
“If you get a strong jobs report, then you might start hearing hawkish comments from some Fed members,” he said. “It won’t be much, but they could start probing the market to test their resolve. If we get good jobs numbers through the summer, the Fed might start laying the groundwork in September to tighten its monetary policy and start tapering its purchases.”
Written by Neils Christensen for KITCO ~ May 6, 2021
