Gold price could consolidate next week, but analysts say you don’t want to bet against it

(Kitco News) – Chaos in the Middle East continues to generate a geopolitical safe-haven bid in the gold market, but there are signs that the precious metal’s bull run is losing momentum.

In overnight volatility, gold prices spiked sharply above $2,400 after Israel carried out a limited military strike against Iran in retaliation for Iran’s drone and missile attack during the weekend. The rising conflict is due to Israel’s ongoing war with Hamas in Gaza.

However, the gold market could not hold its overnight gains and is preparing to close the week out, consolidating around $2,400 an ounce. June gold futures last traded at $2,410.5 an ounce, up 0.5% on the day; prices are up 1.5% from last week.

Analysts also note that Friday’s overnight spike was down from last week’s record intraday high at $2,448.80 an ounce, a sign that even geopolitical uncertainty is losing its grip on the market.

“The thing with the Iran and Israel story is that there isn’t much firepower left in this story for now. When Israel initially attacked the Iranian embassy, market players were anticipating a big response. The Iranian response was more show than anything else, and traders paid attention to this,” said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. “The Israeli government’s response has been very, very limited, and now traders are not concerned about this matter. All of this has put the gold price in a consolidation zone with a risk to the downside.”

Some analysts have said that as geopolitical tensions stabilize, the market could start to focus on more fundamental dynamics in the marketplace, which does not bode well for gold in the near term.

The precious metal has managed to consolidate in record territory even as markets have pushed back Federal Reserve rate cuts to later this year. A June rate cut has all but been priced off the table, and the CME FedWatch Tool puts a July rate cut at relatively even odds.

The gold market has even been able to withstand unexpectedly hawkish comments from Federal Reserve Chair Jerome Powell, who said during an event in Washinton, D.C., that after the latest inflation report, the central bank did not have enough confidence to cut rates. 

Some analysts have said that this environment will continue to support higher bond yields and a stronger U.S. dollar, which are two traditional headwinds for gold.

“I worry that this market may suddenly wake up one morning and realize the dollar and yields are sharply higher and the prospect of rate cuts have all but disappeared,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank. 

However, Hansen added that the market could be quite resilient, and with all the uncertainty in global financial markets, it still has the potential to surprise investors.

“I’m mostly concerned about the massive hedge funds long, but the bulk of these positions was initiated at much lower prices, and although their stop loss levels have been raised as positions built, we can easily see a 50-dollar drop without rattling anyone,” he said. “From a trading psychology perspective, it makes sense that some trigger-happy longs would start to take some chips off the table.”

Lukman Otunuga, Manager of Market Analysis at FXMT, said that although gold is consolidating, it is not a market investors want to bet against.

“Gold’s aggressive jump above $2400 this morning highlights how jittery markets remain to the tensions in the Middle East,” he said. “Although gold has given back most gains after Iran downplayed the impact of Israel’s strike, the path of least resistance points north. The week ahead could see more volatility for the precious metal due to the incoming US Q1 GDP and PCE report which could impact Fed cut bets. Talking technicals, bulls need to keep prices above $2355 for another test of $2400 and beyond. Weakness below $2355 could open a path back towards $2320 and $2300.”

David Morrison, Senior Market Analyst at Trade Nation, said that although volatility could continue to increase in gold and silver, investors shouldn’t ignore the broader bullish trends in the marketplace.

“The story for both precious metals remains the same. Yes, both operate as ‘safe havens’ in times of geopolitical and financial stress. But the story behind the current rally is one of years of relative inactivity being overcome by a realization amongst investors that it’s not a bad idea to diversify one’s assets,” he said in a note Friday.

Other analysts have noted that while shifting expectations around the Federal Reserve’s monetary policy is supporting higher bond yields, that isn’t the full story. Analysts note growing anxiety in the marketplace regarding the size and trajectory of U.S. government debt.

Bond yields can rise as investors demand more money for increasing debt risks, which can be bullish for gold.

“The Fed is on a higher-for-longer trajectory, the US national debt is and will continue to spiral out of control driving structural selling for Treasuries by foreigners (de-dollarization / USA flows). Its supply/demand and investors demand a higher interest for the higher risk lending to the US Gov,” wrote Nicky Sheils, Head of Precious Metals Strategy at MKS PAMPS in a note Thursday. “At some point, the Fed will need to entice in additional demand (they lower leverage ratios so Banks can provide some liquidity) but there is no reason that the Gold/Bond divergence can’t just simply extend. New paradigm, new and extended divergences.”

Next week, the Federal Reserve will start its two-week blackout period ahead of its May 1 monetary policy decision, so markets will have to evaluate the economic data without any guidance. 

On the economic docket is the core March Personal Consumptions Expenditures Index, the central bank’s preferred inflation gauge. Markets will also get a first look at first-quarter Gross Domestic Product.

The market will also receive some more housing sales data and reports on the health of the manufacturing sector.

In central bank activity, markets will listen closely to what the Bank of Japan says in its monetary policy decision as its currency trades at new multi-year lows against the U.S. dollar. Gold prices in yen terms are trading at record highs.

Economic data to watch next week:

Tuesday: S&P Flash manufacturing and service sector PMI, new home sales 

Wednesday: Durable goods orders

Thursday: Advanced Q1 GDP, weekly jobless claims, pending home sales, Bank of Japan monetary policy decision

Friday: Core PCE, personal income and spending