Gold Market Holds Steady, But Longer Sideways Trading Raises Selloff Risk
EDITOR'S NOTE: Despite a hawkish testimony by Federal Reserve Chair Jerome Powell, the gold market has maintained relative stability. However, prolonged sideways trading without new catalysts puts gold at increasing risk of a deeper selloff, warns MKS PAMP. The precious metal dipped below $1,950 an ounce but found support at $1,940. While structural demand drivers support gold as a longer-term asset, the lack of new developments and slow news cycles imply a potential pullback in the near term. Powell's hawkish stance and projected rate hikes contribute to the need to unwind the premium in gold. While factors such as central bank gold buying, physical demand, and retail purchases provide support for a rally, signs of weakness may tip the scales towards a near-term selloff. The outcome of Powell's testimony and the Bank of England rate decision, along with gold's performance at the end of the quarter, will provide further insight into future price trends.
(Kitco News) The gold market remains more or less steady in the face of a hawkish testimony by Federal Reserve Chair Jerome Powell. But the longer gold trades sideways without new drivers, the more at risk it is to a deeper selloff, according to MKS PAMP.
Gold fell below $1,950 an ounce this week but found support at $1,940. August Comex gold futures were last trading flat on the day at $1,946.20 an ounce. Earlier in the session, August futures hit a daily low of 1,929.30.
"Gold is holding in for something, but the longer that doesn't show up, the risk is for a further pullback," said MKS PAMP head of metals strategy Nicky Shiels. "I'm just not as bullishly convinced as I was a couple of weeks ago, and while structural demand drivers are still there for it as a longer-term asset class, it's been in no-man's-land for too long, and the news cycle is simply slow, which usually implies a rerating lower in the near term."
The $1,940-$1,950 an ounce range coincides with the 100-day moving average, and it is known as a bear trap, Shiels said Tuesday. "Spot gold hadn't managed to sustainably close below this handle 10x in the past," she said. "There was predatory paper shorts who re-engaged following the much stronger than expected housing data, taking Gold down almost $30."
With Powell remaining hawkish and projecting two more rate hikes this year, all of the 2023 rate cut bets are off the table, Shiels said. "And with that, the premium needs to be unwound in gold," she wrote.
Based on an analysis of 3-month SOFR futures (a proxy for Fed hikes/cuts expectations) versus gold, "the model implied gold price is $1878/oz, a full $50 lower," Shiels pointed out.
There are still three major drivers out there that support a rally in gold - aggressive central bank gold buying, robust physical demand, and retail coin and bar purchases.
But some signs of weakness could tip the scales towards a selloff, Shiels warned. She pointed to persistent ETF outflows of 42,000 ounces daily for the past two weeks, a lack of appetite from discretionary accounts, and soft physical Chinese demand.
"SGE [Shanghai Gold Exchange] is now at a discount following $40+ premiums a month ago, Chinese Gold imports are down 13% MoM, retail gold/silver jewelry sales have fallen from double-digit growth seen in March-May 2023 as pent-up demand dries up and the effects of the weaker yuan take hold," Shiels said.
This week will be dominated by Powell's testimony (Wednesday and Thursday) and the Bank of England rate decision (Thursday). How gold closes out the second quarter will also provide additional guidance for the summer months' price direction.
"Prices have managed to put in higher lows and higher highs the past three quarters despite collective hawkish rhetoric, a still strong US$, stickier/higher US real rates, and a lack of new bad news (around financial instability and geopolitics)," Shiels added.
Originally published by: Anna Golubova on Kitco News
