(Kitco News) – There is little standing in gold’s way next week that will stop prices from pushing higher in what will be a shortened trading week, according to some analysts.
The gold market is seeing its fifth weekly consecutive gain as prices hold near their highest level in four months. February gold futures last traded at $1,331.70 an ounce, up 0.7% since last Friday. Since its December low gold prices have rallied more than 6.6%.
While gold continues to push higher, silver has hit a hurdle as prices are preparing to end the week in negative territory, ending a four-week winning streak. March silver futures last traded at $17.105 an ounce, down 1% from last week.
Josh Graves, senior market strategist at RJO Futures said that he isn’t reading too much into silver’s recent underperformance.
“I think silver’s weakness is based on the fact that all the attention is on gold,” he said. “Investors see more potential in gold as the U.S. dollar weakens.”
Look For Weaker U.S. Dollar
Many analysts say they are bullish on gold in the near-term as a weaker U.S. dollar provides the biggest tailwind for the market. The U.S. Dollar Index ($DXY) last traded at 91.30, down 0.8% since last week.
“Ongoing U.S. dollar weakness will be the biggest driver for gold in the near term,” said Fawad Razaqzada, technical analyst at City Index. “I am bullish on gold as long as prices remain above $1,300.”
Razaqzada said that the market is bearish on the U.S. dollar as global central banks have turned hawkish. In the past week, the Bank of Japan trimmed its purchases of Japanese government bonds by about $10 billion in the 10-year to 25-year bonds and another $10 billion in bonds with maturities of more than 25 years. A few days later, the minutes from the December European Central Bank monetary policy meeting, showed that the committee discussed revising its forward guidance as the regional economy continues to grow.
Razaqzada, said that growing hawkish sentiment will continue to drive global currencies higher against the U.S. dollar in the near-term.
Not only are other nations looking at tightening monetary policy but analysts note that the U.S. economy faces ongoing concerns like weak inflation pressures that will continue to weigh on the U.S. dollar.
David Madden, senior market analyst at CMC Markets, said that he sees further weakness in the U.S. dollar as weak inflation pressures will keep the Federal Reserve from aggressively raising interest rates.
Friday, the latest inflation data showed the U.S. Consumer Price Index ended the year increasing 1.8%. However, the report noted that inflation remained between 1.7% and 1.8% throughout 2017.
“Economic growth is storming ahead but it’s still a mystery why we are not seeing the same kind of growth in inflation pressures,” he said. “I don’t think the Fed will be in any hurry to raise interest rates as inflation remains low.”
Growing Risks Will Keep A Bid In Gold
While inflation remains low in the near-term, Ole Hansen, head of commodity strategy at Saxo Bank, said that he expects gold is benefiting from renewed diversification as investors look for hedges against the potential increase in volatility and inflation.
Hansen added that the tightening from global central banks is expected to reduce market liquidity, which could ultimately drive volatility higher, creating risks for over-valued equity markets. The CBOE Volatility Index ($VIX) remains well below its historical average, trading around 10 points.
“What we are seeing is an underlying demand for gold, which we haven’t seen for a while,” he said. “Investors are getting a little more cautious as volatility and inflation lurks in the marketplace.”
While Hansen said that there is potential for gold prices to move higher, he would like to see a consolidation period, which would lead to more sustainable gains.
“Gold is on fire right now and has made impressive gains since the Dec. 12 low but I think the market is due for some consolidation,” he said. “Gold needs to consolidate to rebuild investor interest.”
Correlations Are Breaking Down
While there is strong bullish sentiment for gold in the near-term, there is also a chorus of growing concern as important correlations in the gold market have broken down.
In particular, the negative correlation between bond yields and gold has broken down. Traditionally higher bond yields weighs on gold prices because it raise the yellow metal’s opportunity costs.
This past week say 10-year bond yields rise to their highest level since March 2018. However, some analysts have dismissed the relationship saying that gold and bonds can rise in tandem, especially if inflation concerns start to rise.
In a recent interview with Kitco News, Bart Melek, head of commodity strategy at TD Securities said that gold traders should also ask themselves why the relationship between bond yields and gold has broken down.
He explained that the weaker U.S. dollar may signal that global investor are losing confidence in U.S. bonds and the economy, which is positive for gold.
Levels to Watch
With gold’s rally not expected to end anytime soon, most analysts see the September high at $1,357 as the next major near-term target.
Madden added that a break above $1,357 would make the July 2016 high around $1,375 as the next major target.
Some analysts see potential for gold to hit $1,400 an ounce as the market continues to benefit from strong positive seasonal factors.
“Gold is setting up for an extremely strong run and the price action this week puts $1,400 in the cross hairs in a very short period of time,” said Bill Baruch, president of Blue Line Futures. “We want to see Gold maintain a close above previous highs that come in at $1,327.3-$1,328.6 in order to keep this immediate term.”
On the downside, analysts have said that the bullish uptrend will remain in place unless prices fall below $1,300 an ounce.
The Final Say
Not only are markets closed Monday for Martin Luther King Jr. Day, but little economic data to be released will make it a relatively quiet trading week, according to some analysts.
Markets will receive regional manufacturing data as well as some housing construction data. Outside of the U.S. the Bank of Canada will hold its monetary policy meeting. According to reports, markets are pricing in a 75% chance that the bank raises rates next week.