NEW YORK (Scrap Register): Gold’s drop below its critical psychological level of $1,300 an ounce was in the cards for some time amid fading geopolitical risks and rallying U.S. dollar, according to analysts.
Gold prices breached the carefully watched support of $1,300 earlier on Tuesday, as the U.S. dollar index climbed to a five-month high and 10-year bond yields pushed above 3% for the first time since 2011.
June Comex futures were last trading at $1,290.20, down 2.12% on the day, while the U.S. dollar index was last seen at 93.16, up 0.63% on the day, after touching 93.40 earlier in the session.
Analysts told Kitco News on Tuesday that they were not caught off guard by the drop in gold prices and said that the move could be sustainable if the yellow metal fails to recover in the next couple of days.
“Gold is seeing a significant move down today,” said Capital Economics analyst Simona Gambarini. “The dollar is up, which is what’s driving gold prices down.”
Geopolitical risks played a key role in supporting gold prices in the first four months of the year and now that the risks are not as acute, markets are pricing out the geopolitical tensions.
“It doesn’t appear that the support that was benefiting prices in the first half of the year — geopolitical risks — is here to stay and that certainly is pushing prices down. We always believed there was a sizeable geopolitical premium priced in,” said Gambarini.
What’s next for Gold Capital Economics analyst noted that prices are likely to remain at these levels and end the year around $1,300 an ounce.
“We’ve never been particularly bullish on gold this year. Based on fundamentals prices should have been much lower. We’ve revised up our price outlook based on geopolitical risks. But, we’ve always believed that Federal Reserve tightening would put downward pressure on prices,” Gambarini added.
Gold can avoid getting stuck below the $1,300 level once again if markets see a swift recovery above $1,305 level in the next 48 hours, said Colin Cieszynski, chief market strategist at SIA Wealth Management.
“At this point, this is a very significant breakdown for gold. It is trading decisively below $1,300. The new resistance level is now between $1,300-$1,305. And gold needs to get above that level in a day or two or it could be a signal for a more significant move down,” Cieszynski said.
The U.S. dollar rally is based on positive macroeconomic data coming out of the U.S., which could encourage the Federal Reserve to tighten more aggressively this year.
“Empire State manufacturing and retail sales are setting the bar higher. Earlier in the week, you also had Cleveland Fed President Loretta Mester saying that the central bank could send rates to 3%, which means that the Fed could continue raising rates without stopping at a certain threshold,” Cieszynski added.
Gambarini also believes that there is a good chance that gold prices will stay below $1,300 an ounce, especially if risks continue to fade.
“If there are no additional risks and the Fed moves more aggressively in the second half of the year to prevent inflation from getting out of hand, gold prices could stay below $1,300,” she said.
Fed’s Impact RBC Capital Markets commodity strategist Christopher Louney told Kitco News he still estimates another three or four rate hikes this year.
“Fed’s rate increases have been taking a backseat to the U.S. dollar in terms of gold drivers this year so far, but this may change,” Louney said. “Q2 and Q4 will be one of the lower points for gold prices with the annual price averaging around $1,307.”
Louney pointed out that RBC has been calling for price consolidation for some time, with Q2 gold projections lingering around $1,291 an ounce.
“A lot of that downward move has achieved through this latest drop. The dollar is one of the biggest factors as the inverse correlation between gold and the U.S. dollar has been getting strong,” he noted.
But, Louney sees a lot of hope for gold prices in 2019 - projecting an annual average price of around $1,351 based on softening macro headwinds and increased geopolitical risks.
Some of the geopolitical risks traders need to keep a close eye on are trade talks, Middle East tensions and further sanction on Iran or Russia, according to the analysts.
“Risk of a trade war is one factor that we had flagged up at the start of the year. There are many trade negations going on: NAFTA as well as talks between China and the U.S. Also, the U.S sanctions against Russia and Iran don’t appear to be getting worse, but if intensified, could potentially give a boost to gold prices,” said Gambarini. “Any additional tensions could drive investors towards safe-havens.”