(Kitco News) - After slipping into official bear market territory this week, gold and silver are starting to attract new attention. But while both precious metals managed to hold critical support, some analysts are saying that investors should only be testing the waters as they wade back in.
Although gold is looking to end its fifth straight week in negative territory, analysts have said that the precious metal has made some solid progress as it managed to hold support at a seven-month low above $4,000 an ounce. Spot gold last traded at $4,223 an ounce, up 0.28% on the day but down more than 2% on the week.
The silver market has fared slightly better; spot silver last traded at $68.02 an ounce, up more than 1% on the day and virtually flat on the week.
In an interview with Kitco News, Michele Schneider, Chief Market Strategist at MarketGauge, said that gold’s bounce off its lows is encouraging, but she would like to see further confirmation that a long-term bottom has been established.
“ If we can close up at these levels right here, that would tell me that it might be time to at least nibble,” she said. “Gold and silver need to get back above their moving averages before it's an active buy.”
Schneider added that gold’s drop below its 50-day and then its 200-day moving average has done significant technical damage to the charts, so investors still need to exercise caution in the short term.
Simon-Peter Massabni, Head of Business Development at XS.com, said that gold's ability to hold the $4,000 level suggests that long-term investors are beginning to see value in the market despite the recent correction.
"Gold's ability to maintain the $4,000 level reflects the presence of strategic buyers who view any pullback as an opportunity to build new positions," he said. "I also believe that the deep correction phase is approaching its end, and that the market is now closer to building a new price base rather than entering a broader corrective downtrend."
According to analysts, gold and silver are attracting some buying momentum ahead of the weekend on optimistic news that the U.S. and Iran are close to reaching a peace agreement that would end the latest war in the Middle East.
However, some analysts note that the market has been in this position before, and optimism is being tempered. Fawad Razaqzada, Market Analyst at FOREX.com, said that the key issue for gold is how quickly the energy market and oil prices normalize.
“The worst of the selling for gold could be behind us for now, although that’s not to say it won’t fall further over time – especially if oil prices don’t fall back sharply,” he said.
Despite gold’s bounce on Friday, some analysts remain skeptical that this momentum can last. Ole Hansen said that until there is corroborated news that both sides have agreed to a deal, gold prices will remain volatile and continue to struggle.
He added that, regardless of the optimism, it still seems that both sides in the conflict are far apart on some issues.
“Until the inflation genie is well and truly back in the bottle, the uncertainty related to energy prices and how they may drive inflation means gold will be stuck with a ball and chain,” he said.
While geopolitical uncertainty will continue to dominate gold’s short-term trend, markets are eager to see how the ongoing energy crisis and inflation fears are impacting the Federal Reserve, which is under new leadership.
Next week will be Kevin Warsh’s first monetary policy decision as the new Chair of the central bank. Some analysts note that next week’s Fed meeting is one reason they are hesitating to jump on the gold bandwagon just yet.
Elevated inflation is prompting markets to solidify expectations for rate hikes before the end of the year. Markets see a roughly 50/50 chance of a rate hike in October.
Although the Federal Reserve is not expected to raise interest rates next week, some economists have said they expect the central bank to establish a new tightening bias, which could be negative for gold in the short term.
“The potential for a big move in gold is there. If he delivers some surprising remarks about inflation and interest rates, if he’s more hawkish than expected, then this would be bad news for gold,” said Razaqzada.
Barbara Lambrecht, Commodity Analyst at Commerzbank, said that the only unknown element next week will be what Warsh says during his press conference. She said that his tone will set the path for gold.
“If Kevin Warsh were to surprise the market with hawkish remarks, the gold price would likely fall further. If, on the other hand, he were to dampen expectations of interest rate hikes, the gold price would likely recover slightly,” she said.
Despite all the attention surrounding June’s meeting, some analysts have said that in the long term, the gold market has nothing to fear from the Federal Reserve.
In a recent interview with Kitco News, Jeff Clark, publisher of The Gold Advisor, said that even if rates do eventually go up, there is a limit to how high they can rise. He explained that the U.S. economy will not be able to handle higher borrowing costs.
Hansen said that he also sees limited action from the Federal Reserve.
“It’s our base case that the USD rally won’t persist and rates either turn lower or the Fed does something to prevent them from rising further,” he said, noting that in both scenarios, gold wins.
Although the Federal Reserve’s monetary policy meeting will be the highlight, next week will be a busy one for central banks. The Bank of Japan, the Reserve Bank of Australia, the Swiss National Bank, and the Bank of England will all make monetary policy announcements.
Looking beyond monetary policy, regional manufacturing data, U.S. housing market data, and retail sales numbers could create some short-term volatility.
Economist data to watch next week:
Monday: Empire State Manufacturing Survey, Bank of Japan monetary policy decision
Tuesday: Reserve Bank of Australia monetary policy decision, US housing starts and building permits
Wednesday: US Retail Sales, US Pending Home Sales, Federal Reserve monetary policy decision
Thursday: Swiss National Bank monetary policy decision, Bank of England monetary policy decision, Philly Fed Manufacturing Survey, US weekly jobless claims
Friday: US markets closed for Juneteenth
