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U.S. dollar direction and comments from Federal Reserve Chairmen Ben Bernanke will influence the gold market next week.The U.S. dollar’s strength was a factor in gold-price weakness this week, as the dollar index rose to its highest level since August 2010. Whether the greenback continues to rise or pulls back will determine where gold goes next week, market participants said. The dollar’s trajectory itself will likely hinge on what Bernanke says about the U.S. economy in two appearances slated over the next week.
June gold futures fell Friday, settling at $1,364.70 an ounce on the Comex division of the New York Mercantile Exchange, down 5% on the week. July silver slipped Friday, settling at $22.352 an ounce, down 5.52% on the week.
In the wsj News Gold Survey, out of 36 participants, 28 responded this week. Of those 28 participants, nine see prices up, while 17 see prices down and two see prices moving sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts..
Participants in the survey are decidedly bearish. Several who see prices falling cited the short-term technical-chart based trend with the yellow metal possibly returning to the mid-April lows in the low $1,320s. Others, though, said sentiment in gold became too bearish and they see the market finding support not far from current lows.
The dollar saw some modest weakness on Thursday, but shook that off Friday. “The main reason for the gains in the U.S. dollar over the past week is the growing belief that the Federal Reserve will scale back their asset purchase program earlier than expected. (On Thursday) Federal Reserve Bank of San Francisco President John Williams said the central bank may reduce its $85 billion in monthly bond buying as early as this summer,” said Alan Bush, senior financial futures analyst at Archer Financial.
A key part of tapering off the Fed purchases is continued improvement in employment, Williams said at the time.
Given Williams’ comment, market watchers said they are going to look closely at other Fed speakers next week to see if they also echo Williams’ statement. Of critical importance will be two speeches by Bernanke, who will speak first on Saturday about the long-term economic prospects and then in front of Congress on Wednesday, where he will also address the economy.
“Any indication that (a) tapering remains far off and (b) growth is still below where the Fed would like would hurt” the U.S. dollar, said BNP Paribas, which has been skeptical of the dollar gains.
Yet there are many others who see the dollar in a long-term uptrend and that is bearish for commodities in general since they are dollar-denominated. They said any losses in the dollar are slim and noted Friday’s move was higher again.
“We still think the other side of that equation (relative weakness in the rest of the world) remains in play. In May, we've seen rate cuts and dovish surprises from the ECB (European Central Bank), RBA (Reserve Bank of Australia), and the central banks of Israel, Poland, Korea, India, and Turkey. The economic outlook for the rest of the world is getting worse and the U.S., while disappointing a bit recently, remains on track for a modest recovery,” said Brown Brothers Harriman.
Bob Haberkorn, senior commodities broker, RJO Futures, said the short-term trend in gold is down, although longer term he still likes gold. He said because of the dollar strength, “the path of least resistance in gold is down. I wouldn’t be surprised to see it test the April lows” of $1,321.50 basis June Comex contract.
The comments from Bernanke will be the most important event for the week, especially if he talks about the current bond-buying program, known as quantitative easing, Haberkorn said. His comments will impact not only gold, but also other financial markets such as U.S. Treasury bonds and equity markets.
As many market watchers said in recent weeks, the record highs in equities have siphoned demand away from gold and other commodities. The rise in stocks has come without a significant correction, and that’s something that worries Haberkorn and others, who said the longer equities rise without a breaking, the greater the fall will be.
BEARISH SENTIMENT OVERDONE
Not everyone is so negative on gold. In fact, some say because sentiment in gold is so beat up, that it might be time to step back in, at least for a short time. Gold has closed lower for seven consecutive sessions. Open interest on the Comex rose about 4,300 contract since May 10 through Thursday, meaning that new short positions likely were established with the price decline.
Ken Morrison, founder and editor of online newsletter, Morrison on the Markets, said since 2009, gold prices have never closed down seven days in a row. He said it’s possible that gold might see some further weakness initially next week, but he sees the market regaining strength by the end of next week.
After being bearish on gold, this is “the first time we've been bullish gold for quite some time, of the opinion the large-volume decline has about run its course,” Morrison added.
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