Gold Market To Watch Economic Data, Options Expiration

(Kitco News) – The gold market will keep an even closer eye on economic data next week, following comments by Federal Reserve Chairman Ben Bernanke on Wednesday regarding the fate of the Fed’s bond-buying program.

Worries that the Fed will taper off its asset purchases to stimulate the U.S. economy have hit gold and other markets, and the results of economic data releases will color traders’ perceptions of what the Fed might do with the program.

Market participants said they’ll also watch to see how the Comex futures market is affected by next week’s option expiration, which could have a short-term impact on prices.

June gold futures fell Friday, settling at $1,386.60 an ounce on the Comex division of the New York Mercantile Exchange, up 1.6% on the week. July silver slipped Friday, settling at $22.496 an ounce, up 0.6% on the week. It’s a holiday-shortened trading week in both the U.S. and U.K. next week, with markets in both countries closed on Monday.

In the Kitco News Gold Survey, out of 36 participants, 28 responded this week. Of those 28 participants, 14 see prices up, while nine see prices down and five see prices moving sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

After comments Wednesday by Federal Reserve Chairman Ben Bernanke, analysts said economic data will have an even greater impact on market direction. Financial markets in general roiled when Bernanke seemed to say that the Fed could both keep the current bond-buying program in place to nurture the U.S. economy, and curb the program if economic data improved. Gold prices initially rose during the first half of Bernanke’s speech then fell when the talk about the possibility of the Fed tapering purchases arose. Currently the Fed is pumping in $85 billion in Treasury and mortgage-backed securities per month, known as quantitative easing. Bernanke’s comments came just before economic news out of China was lower than expected, adding to global growth worries.

Several market watchers said that they expect the asset purchases to continue through the rest of the year, adding that they believe Bernanke doesn’t want to prematurely end the stimulus program. That’s why the economic data releases are particularly important.

“Market expectations with regard to the timing of tapering will largely depend on U.S. data outcomes and any marked shift in Fed communication,” said Barclays, which added that they expect a broadly higher U.S. dollar in the second half of the year as the U.S. economy picks up steam.

Economic data releases for next week include consumer sentiment, housing and the most important economic report of all, the monthly U.S. unemployment report. Economists are expecting consumer sentiment to pick up from last month’s figures, based on the strength in the stock market.

For the jobs report, Barclays said they forecast a 175,000 increase in May payrolls and for the unemployment rate to fall to 7.4% from 7.5% in April.

This week gold prices found some support when equity markets pulled off their record highs, analysts said, although gold remains trapped under $1,400. Record equity values have capped gold’s rise as investors seek returns outside of the yellow metal.

Edward Meir, commodities consultant at INTL FCStone, said although gold ended with gains this week, additional strength could be short-lived. “On balance, we suspect that gold prices will resume their downtrend, especially if the global equity downward blip turns out to be a short-lived affair. The medium-term outlook for gold in our view still does not look that appealing and short of a total rout in the equity markets, we don’t see any compelling reason why investors should start scaling in on the long side. Moreover, despite Bernanke dancing around the question of when the stimulus will be removed, at this stage, the move is more of a matter of when rather than if. When it does occur, it could knock out a key prop from under the gold market going forward,” he said.

The futures market has two events next week that could shape activity, participants said. The first is the June gold options expiration on Tuesday. Kevin Grady, owner of Phoenix Futures and Options, said the options expiration likely supported prices toward the end of this week and could keep values lifted Tuesday.

“There’s a big put spread between $1,375 and $1,450, and the $1,375 area seems to be offering some support. But after Tuesday, all bets are off. This market has been trading with no rhyme or reason,” he said.

The second event is first-notice day for the June gold futures on Friday. Grady said with many speculative funds short, or bearish, gold, and with prices not far from their recent lows, he expects those traders will roll their positions. In this case, rolling a short position would entail a simultaneous buying back of a short June position and selling of a deferred position. He said outright prices aren’t likely to be affected by the rolling of short positions, but the spread price between nearby and deferred futures positions could be.

Follow me on Twitter! If you want to keep up with metals news and features, then follow me on Twitter. It’s free, too. My account is @dcarlsonkitco

By Debbie Carlson dcarlson@kitco.com

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