UK Markets close in 4 hrs 20 mins

Price of Gold Fundamental Weekly Forecast May Have Found Value, But Needs Catalyst to Drive It Higher

James Hyerczyk

Gold nudged higher last week after investors found support slightly above a key technical retracement area. There wasn’t a particularly bullish event that drew the attention, nonetheless, the market rallied from earlier weakness anyway. We can only speculate as to what fundamental event brought buyers back into the market. From a technical standpoint, buyers were likely attracted to value after the market posted volatile price swings the previous week.

Last week, February Comex gold settled at $1560.30, up $0.20 or +0.01%.

Most of the news last week was U.S. Dollar friendly, which tends to weigh on demand for dollar-denominated gold. U.S. Treasury yields rose and the major stock indexes hit record highs several times. All of these events tend to keep a lid on gold prices or even drive them lower.

Geopolitical Events

President Trump signed a “phase one” trade agreement with China as the world’s two biggest economies try to rein in a more that 18-month trade war. The deal includes provisions to root out intellectual property theft and forced technology transfers and increase Chinese purchases of U.S. goods, though it leaves open questions about enforcement. The Trump administration aims to start negotiating the next piece of the trade agreement before the November 2020 election.

China said Friday its economy grew by 6.1% in 2019, meeting expectations even amid a trade dispute with the United States. Analysts polled by Reuters had expected China’s economy to have grown 6.1% in 2019, compared with 6.6% in 2018. Still, China’s GDP growth last year was the slowest since 1990, according to Reuters records.

U.S. Economic News

Strong economic data lifted investor sentiment and the U.S. Dollar last week. Weekly jobless claims unexpectedly dropped by 10,000 to 204,000. Economists polled by Reuters expected a print of 216,000. Meanwhile, retail sales climbed by 0.3% in December, matching expectations. The Philadelphia Federal Reserve business index also jumped to 17 in January from 2.4 in December.

Consumer prices rose slightly less than expected in December and monthly underlying inflation pressures retreated, which could allow the Federal Reserve to keep interest rates unchanged throughout this year.

The U.S. Labor Department also reported its producer price index for final demand ticked up 0.1% last month after being unchanged in November.

Finally, U.S. housing starts soared nearly 17% in December to a 13-year high, according to a Friday release from the Census Bureau.

Weekly Forecast

Gold came in weaker last week on Monday and Tuesday, but prices firmed on Wednesday, Thursday and Friday. On Wednesday, the U.S. and China signed their trade deal. Perhaps gold investors are betting that the deal will fail over the long-run because it can’t be policed, leaving open the possibility that China will renege on its end of the bargain at some time in the future.

Perhaps gold investors are betting on a stock market crash. Despite the market sitting at a record high, many experts are beginning to question valuation. This could mean a near-term correction is in the cards.

Maybe gold investors found value. Remember that gold was trending higher throughout December before prices went into hyper-drive after a U.S. rocket attack killed a high ranking Iranian military official and Iran retaliated with a missile attack.

On January 2, one day before the U.S. attack, gold settled at $1528.10. Technically, a major valuation zone comes in at $1533.20 to $1514.30. Last week’s low was $1536.40.

Perhaps buyers saw value at $1536.40, slightly above $1533.20 and $1528.10.

Like I said earlier, it’s all speculation why gold rallied late last week. But keep in mind, it didn’t really take out any significant tops so gains were essentially capped.

If the U.S. Dollar were to suddenly weaken or stocks were hit hard by a correction, I can see gold jumping to at least $1574.90 to $1583.90.

We may not know why gold buyers came in, but I’m not convinced it will move much higher unless there is a major catalyst to drive prices up.

This article was originally posted on FX Empire