Gold prices enjoyed a late-week surge as concerns about the global economy reinvigorated flight-to-quality buying, building on the recent short-term higher trend seen in the metal.
If those concerns spill into next week, gold may continue its ascent, particularly as technical charts show support, but market participants said traders should stand on guard in case profit-taking occurs following Wednesday’s Federal Open Market Committee meeting.
February gold futures rose Friday, settling at $1,264.30 an ounce on the Comex division of the New York Mercantile Exchange, up 1% on the week. March silver fell Friday, settling at $19.765 an ounce, down 2.7% on the week.
In the Kitco News Gold Survey, out of 33 participants, 22 responded this week. Thirteen see prices up, while five see prices down and four see prices trading sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.
A fall in U.S. Treasury yields and a sharp sell-off in emerging-market currencies accelerated, causing traders to take a “risk off” view, spurred by concerns about an economic slowdown in China, several market watchers said. The news let gold build on its previous gains this week, pushing the yellow metal above tough technical-chart resistance in the $1,250 to $1,255 area.
“Some observers attribute the emerging-market sell-off to the Fed tapering. We are sympathetic to arguments that higher interest rates and a reduction of global liquidity would hurt those emerging markets that rely on external financing - account deficits - but the heightened problems in Turkey or Thailand, or Venezuela or Argentina, or the Ukraine, don’t have much to do with Fed policy or global liquidity,” said Brown Brothers Harriman.
Alex Manzara, vice president, RJ O’Brien and Associates, who watches interest rate futures, said the worries about the weakness in the emerging markets caused both Eurodollar futures and Treasury futures to change direction quickly, starting Thursday.
“With the weakness in the emerging markets, there’s now some thinking that perhaps the Fed won’t continue to their tapering program as we’re seeing stress in these other markets,” he said.
Longer-dated yields have been rising as the Fed announced its tapering program, and many trades in the debt markets have reflected that, so when yields started to soften and prices rose, people who put on those trades started to exit, causing a snowball effect.
Equity prices also pulled back on Thursday, and all of this is supporting gold prices. The stronger equity market in 2013 was one of the weights on gold prices last year.
“This is all very positive for gold. What I think we’re seeing is some asset allocation going on. We’ve never really had a pullback in equities. I’m not saying (prices will melt down) but things had gotten a bit frothy,” said Charlie Nedoss, market strategist at LaSalle Futures Group.
Manzara said he expects the trend of lower yields to continue for a bit, as investors may move back to bonds and out of stocks for the time being.
“The stock market is starting to sit up and take notice. I was very negative bonds (before), but I think we’ll start to see this flight to quality going on for a little while,” he said.
Ten-year U.S. Treasury note yields have ranged between 3% and 2.5% lately, and are sitting around 2.75% currently. Manzara said he wouldn’t be surprised if yields slip back to the 2.5% area, but he expects that low to hold.
Weaker interest rate yields can support gold prices since it lessens the opportunity cost in holding gold as the yellow metal has no yield.
Despite some ideas that the Fed won’t taper next week, Manzara said he expects the Fed to continue to wind down the stimulus.
Analysts at Nomura forecast another $10 billion reduction in the Fed’s asset-purchase program. “We believe the committee will take this step because of stronger economic data, moderate reaction of financial markets to the December decision to taper and comments from FOMC participants suggesting they are comfortable with the economic outlook,” they said.
Alex Thorndike, senior precious metals and foreign exchange dealer at MKS (Switzerland) SA, said a fall in yields supports the Fed’s case to taper Wednesday.
Gold market participants will also keep an eye on India following news reports this week that there were calls for lifting of the current high import duties on the metal. Gold has two more reasons for potential gains next week, analysts said, listing last-minute buying by Chinese shoppers ahead of their New Year festivities, and positive technical-chart formations.
“Technically gold crossing and closing above $1,250 last week sets the metal up for a move over $1,300 soon,” said Zach Oxman, portfolio manager at TrendMax.
By Debbie Carlson dcarlson@kitco.com
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