If gold prices can hold near where they ended this week, the yellow metal may be able to rebound next week to start off the second quarter on a firmer foot, market participants said.
Prices were higher on Friday and on the week. The most-active June gold contract on the Comex division of the New York Mercantile Exchange settled at $1,671.90 an ounce, up 0.42% on the week. May silver settled at $32.484 an ounce, up 0.66% on the week.
Gold prices ended the month of March down 2.46%, but ended the quarter up 6.38%. Silver fell 6.23% on the month, but is up 16.18% on the quarter.
In the Kitco News Gold Survey, out of 32 participants, 22 responded this week. Of those 22 participants, 13 see prices up, while six see prices down, and three are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.
Gold’s price performance lately has been lackluster. Physical demand is down in Asia, in part because of a strike by Indian jewelers over a higher import tax on the metal, which has weighed on prices. Also, investors in exchange-traded funds are also less enamored of the metal, as witnessed by outflows from these investment products.
Gold is being torn in two directions, said Edel Tully, precious metals strategist at UBS. The generally improved U.S. economic outlook weighs on the metal, but it falls when riskier assets do, so it hasn’t acted like a safe haven. Tully said gold will likely retain its allegiance to riskier assets.
“Gold’s correlation with the S&P 500 (as of Friday morning) is near the month’s highs at 0.54, on a 20-day rolling average basis. Given where things stand, we are more inclined to think that gold would suffer in a risk-off scenario, particularly given the lack of physical demand and overall absence of quality sponsorship. We don’t expect that the current events in Europe will prompt safe haven buying, and instead it will be the actions of (speculators) that will influence the gold price ahead,” she said
Charles Nedoss, senior market strategist at Olympus Futures, said the $1,660 area for the June contract will be key for the market next week. “If $1,660 can’t hold, then I think we go to $1,640,” he said.
There is one additional support level for gold from last week, around $1629. If that area doesn’t hold, Nedoss said it will likely uncover pre-placed sell orders – known as sell stops – and cause prices to tumble further.
Next week is a bit special because it’s the start of a new quarter and that’s one of the reasons why Nedoss said gold’s ability to hold $1,660 is critical.
If gold stays above $1,660 that may entice second-quarter asset allocation into the metal, he said, if investors feel gold is trying to put in a short-term floor. If it cannot, then these investors might hold back, hoping to buy gold at a discount to current values.
Despite the poor monthly performance, Arnett Waters, principal, A.L. Waters Capital, said gold’s action this year isn’t all that bad. The market continues to be underpinned by the ultra-loose monetary policy and stimulus from central banks.
Friday’s news that more money was put into a eurozone bailout fund is positive for gold, he and other analysts said. “I’m glad that they increased the firewall. But they’re on a path to printing money and will be indefinitely,” Waters said.
European officials boosted the eurozone bailout funds to EUR700 billion from EUR500 billion Friday. According to news reports, EUR500 billion will come from the European Stability Mechanism, the permanent bailout fun, with EUR200 billion from the European Financial Stability Facility which is the existing bailout programs for Greece, Ireland and Portugal.
But the situation in the EU is not over, Waters said, as there are concerns about the health of the Spanish and Portuguese economies. Spain will unveil its budget with full details to parliament on Tuesday, but news reports Friday said the Spanish government is presenting a 27 billion euro deficit-reduction plan. Heavy cuts in government spending across the board and higher taxes on corporations are expected.
It’s a fairly heavy data week next week in the U.S., with the biggest report of them all, U.S. payrolls, slated for release on Friday. Market watchers said this report will be extremely important given the trend of improving jobs data seen in the past few months. Furthermore, after Federal Reserve Chairman Ben Bernanke’s comments earlier this week that he’s not sure the labor gains seen so far this year are sustainable, market watchers will weigh the data carefully.
Analysts at BNPParibas said the 200,000 level will be the pivot point for the market. “If it is above, then risk and bond yields could both gain sufficient support to help the dollar; if it falls below expectations, then more easing measures after the roll-off of Operation Twist in June and greater confidence in the Fed’s ‘late 2014’ low rates commitment might support risk but not help the U.S. dollar,” they said.
The gold futures market will be closed for Good Friday, but the U.S. Treasury market will be open. Nedoss said depending on how the dollar moves in relationship to the news will affect gold. A stronger dollar could mean weaker gold prices.
The recent weakness in gold prices has caused many investment banks to curtail their average price outlook for gold for 2012. Many of these banks have a dimmer forecast for the second quarter. Among them, UBS, TD Securities and Deutsche Bank reduced their average gold price for the year to reflect the lackluster activity in March.
Slowing growth in China, ho-hum U.S. economic growth and lightening up of monetary stimulus may cause gold to stumble in the second quarter. But by the second half of the year, many think gold will be back on its upward trajectory.
Waters agreed. He said he sees gold trapped in its current wide trading range of $1,650 to $1,800 this quarter, but then rising to $2,450 by the end of 2012.
Debbie Carlson – Kitco News – March 30, 2012