Gold is on a cusp of $2,000 an ounce level. Can the yellow metal continue its historic price rally and breach this level, and more importantly, trade above it?
At the time of writing, spot gold was trading at $1,979.10, up 0.11% on the day, after hitting a record high of $1,984.66 earlier in the session. And the December Comex gold futures were at $1,994.60, up 0.44% on the day.
The next move will depend on real Treasury yield, which are heading deeper into negative territory, said Pepperstone head of research Chris Weston.
“My gold sentiment guide has not given any bearish signals just yet and I am happy to hold a bullish bias, believing pullbacks will prove to be shallow and $2k is likely,” he said on Sunday.
U.S. fiscal negotiations will be playing a key role, according to analysts.
“Having passed the expiry of unemployment benefits, we eye this Friday’s ‘soft’ deadline before Congress heads to Summer recess, although there is the option to keep talks going until Monday 10th,” said Weston. “Reports (on Sunday) suggest that House Speaker Pelosi and White negotiators are still someway apart on restoring the $600p/w jobless benefits and that won’t inspire.”
The gold price will be watching the amount of the fiscal stimulus passed, said RJO Futures senior commodities broker Daniel Pavilonis.
“For gold, it will depend on how much stimulus is passed. If they start to wind down the stimulus, then there is a real possibility that gold softens a bit. If they ramp it up and continue to print up money, then gold should move higher,” he said Friday.
A weaker U.S. dollar pushed gold prices to new all-time highs last week and if this trend continues, gold could see more gains going forward.
“Gold prices again tested new highs [Friday] and while real yields remains the key driver, the correlation with the USD has strengthened the USD testing two-year lows has propelled prices to new highs,” said Standard Chartered precious metals analyst Suki Cooper. “It bodes well for gold, that we expect the USD to weaken and expect real rates to remain negative.”
ING head of commodities strategy Warren Patterson projects weaker U.S. dollar for the rest of the year. “This is one factor which shouldn’t provide too much resistance to potentially higher prices,” he wrote last week.
The drivers are all still there for gold to keep climbing above $2,000 an ounce, Patterson noted, adding that he sees gold ending the year at $2,100 an ounce.
“Clearly the bulk of drivers are telling us that there is further upside to the market, and we believe it is only a matter of time before the market breaks through the US$2,000/oz level,” he said. “We expect prices to face some resistance as it approaches this level like we saw earlier this week.”
Caution ahead
Gold investors cannot forget that a price pullback is expected in the short-term, given how quickly prices have moved up. However, the overall trend in gold remains bullish, Cooper stated on Friday.
“Prices are technically overbought; given how quickly prices have rallied, the risk of a temporary pullback has risen. But the balance of risks remains skewed to the upside for gold in light of the macro backdrop remaining exceptionally favourable; any near-term corrections are likely to be viewed as buying opportunities,” she said.
The biggest risks to the gold price rally are a quick and successful roll-out of the COVID-19 vaccine, swift USD recovery, and profit-taking, Patterson said.
Traders should also watch out for a repeat of what happened in March, which could have a major negative impact on gold, Patterson added.
“While a renewed sell-off in risk assets should provide upside to gold, there is the potential that we see a repeat of March, where a selloff in other asset classes, saw investors liquidating gold positions in order to meet margin calls,” he said.