Things don’t look good for gold in the near term as last week’s momentum is gone. The yellow metal looks set to test the next support level at $1,755, and inflation is triggering a mixed response in gold buying. Retail investors are snapping up gold coins to protect against inflation, but it isn’t enough to offset the selling in other areas of the market.
In a recent note, Ole Hansen of Saxo Bank noted that gold again failed to break through the particularly strong resistance level of $1,835 an ounce, just as it has done six other times since the middle of July. It looks like the Federal Reserve won’t start tapering until at least December, but gold has not done well despite the signs of a lackluster economy.
According to Hansen, the continued strength in global stocks reduces the need to hold gold for diversification purposes. Additionally, the dollar hasn’t broken through its support after its recent failure to penetrate its key resistance level. Bond yields have also climbed higher on the back of growing wage pressure and a heavy Treasury auction calendar.
Real yields sit at around -1% and could rise further, but Hansen believes the dislocation between gold and real yields this year could mean that a 20 to 25 basis point increase in yields won’t have a negative impact on gold. He believes the U.S. dollar will have a greater impact on the direction of gold, and that has been the case so far.
Retail Interest in Gold Has Picked Up
Hansen also reports that money managers have not been buying gold in recent months, although there has been some buying from other parts of the market. Key physical markets like India and China have especially been interested in the precious metal.
Meanwhile, retail investors have also been buying gold, scooping up coins from the U.S. Mint and Perth Mint faster than they have in years. Hansen noted that interest rates for bank accounts in some parts of the world are negative, which could be driving retail investors in those areas to buy gold as a hedge against inflation.
Central banks have also been buyers of the yellow metal, as the World Gold Council reported that net buying for the first 7 months of the year reached 347 tons. In all of 2020, central banks bought just 263 tons of gold.
Support and Resistance Levels
The technicals haven’t been good for gold either. Hansen warned that a close below the 200-day moving average at $1,810 an ounce on Tuesday would set gold up for another move lower, and that’s exactly what happened. He set the initial support at $1,793, but the yellow metal quickly broke through that on Wednesday, falling as low as $1,784 an ounce.
According to Hansen, the next area to watch is $1,770 an ounce. However, Edward Moya of OANDA said in an email that he’s watching $1,755. He warned that a break below could take the metal as low as $1,700 in the near term.
“Once the market can see past these next few months of pricing pressures, the reality of global disinflation forces will likely put an abrupt end to the move higher in Treasury yields, triggering a resumption of gold buying for many investors,” Moya said.
Gold Affected Little by ECB Meeting
Analysts were looking ahead to the European Central Bank’s meeting on Thursday for clues about what might happen to the gold price, but the commentary had little effect on the yellow metal. The ECB left interest rates the same and announced that it is trimming its emergency bond purchases but insisted that it isn’t tapering.
In another email Thursday morning, Moya noted that the ECB statement was “somewhat hawkish” due to the surprise about the reduced bond buying. However, he also said that good news for the euro is also good for gold prices. He warned that while the metal was hovering at around $1,800 an ounce, that could quickly fade.
“If dollar resilience becomes the theme for the rest of the week, gold could see sellers take [the] price down to the $1750 level,” Moya said.
In the wake of the ECB meeting, the new resistance for gold prices appears to be around $1,800 an ounce, as the metal has bounced off that level a couple of times since the meeting.
Covid Remains the Biggest Factor
Perhaps the biggest concern for gold prices right now is the Delta variant of Covid-19.
“Gold prices rebounded as investors grew cautious over the COVID impact on the economy after NIAID director Fauci reiterated we’re still in pandemic mode,” Moya added. “He told Axios that Americans are now getting infected with COVID-19 at 10 times the rate needed to end the pandemic. The Fed’s Beige Book showed economic growth is getting rattled by the Delta variant, and that will continue to weigh on the outlook.”
Moya also said the stimulus trade isn’t dead yet, which is also good news for gold. He expects the metal to see support as central banks slow their stimulus reductions. Moya pointed out that the Bank of Canada has become cautious on growth concerns, while both the ECB and Federal Reserve will have “gradual taper plans that won’t really get going until next year.”
What’s Next for the Gold Market?
It seems clear that the gold trade won’t be going away anytime soon, especially as consumers snap up the metal to hedge against inflation. Central banks will also continue to support gold prices with their buying.
There are plenty of economic concerns to drive gold prices, especially as the Delta variant spreads. However, it seems clear that these concerns aren’t what’s driving the precious metal right now. The dollar remains important for gold prices, although even its impact on the metal appears to have weakened.
The fact that the Fed and the ECB are leaving interest rates low could provide support for gold alongside weak economic growth. However, gold appears to be in a holding pattern for now without any factors being strong enough to pull it outside of its range.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.