U.S. Dollar, Jobs Data Are Key To Gold Market Direction

(Kitco News) – The gold market flips the calendar to June on Monday watching the U.S. dollar and awaiting several key pieces of information, including a monthly jobs report, to find further direction after falling 16.8% year-to-date.

August gold futures fell Friday, settling at $1,393 an ounce on the Comex division of the New York Mercantile Exchange, but up 0.4% on the week. For the month of May gold fell 5%. July silver slipped Friday, settling at $22.243 an ounce, down1% on the week.  For the month silver is down 8% and is down 26% on the year.

In the Kitco News Gold Survey, out of 36 participants, 27 responded this week. Of those 27 participants, 17 see prices up, while four see prices down and six see prices moving sideways or are neutral. Survey participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Gold scratched out two straight weeks of higher closes and for the short-term many market participants see the yellow metal at least testing the upper end of the current price range. Weakness in the U.S. dollar and wobbly equity markets, particularly in Japan as the Nikkei plunged, supported gold this week.

Barclays said the retreat in stocks is healthy, given the sharp rise earlier this year.

How much long gold can rise depends on the dollar, stocks and whether the market can break through stiff technical chart resistance at $1,425, analysts said. Gold ended the week with gains, but just barely after prices fell Friday following stronger-than-expected manufacturing data in the Chicago PMI.

“I think it’s going to be a really tough call. We could easily see gold prices trade both the upside and the downside next week. I think we had a little sticker shock when gold got over $1,400. The question is, will we see flight to quality if the equities continue to break, or does gold fall if the dollar rallies? I think we’ll see some shallow strength in gold, that we’ll end the next week higher than where we are now,” said Adam Klopfeinstein, market strategist with Archer Financial Services.

Discussions about the big short positions in gold by some speculative traders have many analysts warning of potential spikes if prices rise through key technical chart points, but Kevin Grady, owner Phoenix Futures and Options LLC said he believes a lot of those short positions are gone. This week, Comex open interest showed a drop of 49,000 contracts, an 11% fall.

Open interest is a measure of the number of outstanding positions in the market; when open interest falls, it means the positions are closed.

With the drop in the open interest, he’s worried would-be buyers on rallies won’t be there to participate to advance any potential rally.

“I think this is a bearish sign. We did rally (Thursday) … but it didn’t attract any buying. I think this market has problems until it can get over $1,535,” Grady said.

Looking to next week, market participants said there are several events that could drive market direction if those events come out different than expected.

There will be more discussion about the Federal Reserve’s monetary policy as the Fed Beige book is scheduled for release Wednesday, in preparation for the Federal Open Market Committee meeting June 18 and 19.

Financial markets in general are starting to prepare for the Federal Reserve’s exit from its ultra loose monetary policy, Barclays said, which means investors need to start positioning themselves for less money floating around.  Equity markets were wobbly this week, with U.S. equities down and Japanese equities off sharply on that idea.

“Market movements are saying the Fed’s exit is now more ‘when’ than ‘if’,” the firm said.

Barclays said the firm’s basic scenario is that the U.S. will have a gradual economic recovery and the Fed will taper its bond buys. Based on that view they favor equities over bonds in the medium term, as safe havens lose their allure.

They said nominal real yields in 10-year U.S. Treasury notes and the Treasury Inflation Protected Securities are up about 40 basis points since the May U.S. jobs report.

They also see gold struggling in this environment as the yellow metal “remains vulnerable to a further correction in safe havens,” they said.

The European Central Bank will grab a lot of attention as it meets Thursday.  No policy changes are expected; however, after recent weaker-than-expected eurozone data, market participants will watch for any hints from the ECB future policy.

“Continued weakness in the real sector will surely fan expectations of further action down the road, and that is likely to continue weighing on the euro,” said Brown Brothers Harriman, which could be dollar supportive.

On Friday the May unemployment report slated for release and this is always considered the most important report. This will be the last unemployment report before the June FOMC meeting on June 18-19 and many market watchers said the markets will look to it for monetary-policy implications.

“That’s going to be a huge number. If it comes out horrible, gold could explode. But if it comes out to show jobs are stabilizing, gold will sell off,” said Grady.

By Debbie Carlson dcarlson@kitco.com

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