Gold investors watching inflation data next week to see if this new momentum will last

Gold investors watching inflation data next week to see if this new momentum will last

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After two weeks of consolidation, gold is attracting some new bullish attention after holding initial support at around $2,300 an ounce, according to some analysts.

Bouncing off its lows at the start of the week, gold is looking to end Friday near a two-week high. June gold futures last traded at $2,375.40 an ounce, up nearly 3% from last Friday’s close.

At the same time, silver has managed to push back above $28 an ounce after holding critical support levels. May silver futures last traded at $28,310 an ounce, up a solid 6% from last Friday.

Some analysts note that gold is benefiting from fluid interest rate expectations following disappointing economic data. Thursday, a jump in weekly jobless claims pointed to growing slack in the U.S. labor market and brought renewed focus to last week’s disappointing nonfarm payrolls report.

Friday, the Univerisity of Michigan’s preliminary consumer sentiment survey showed optimism falling to a five-month low, while inflation expectations rose to a nearly two-year high.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that it is not surprising that gold is seeing a renewed push to the upside as the market’s bullish conviction has not been tested during the two-week consolidation period.

“Now we see a technical break to the upside, supported by signs the U.S. labor market is cooling. With inflation being controlled, the expected number of U.S. rate cuts has been lifted to two from one,” he said.

However, some analysts warn that although markets are now pricing in two rate cuts this year, these expectations are extremely fluid.

Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said he expects rallies in gold and silver to be sold in the near term.

“Traders do not have a clear signal from the Fed in relation to their monetary policy,” he said. “The job data and other economic numbers indicate that the economy is slowing down, but the Fed is still determined to keep rates higher for longer. All of this is bringing strength back to the dollar index and taking the shine away from the metal.”

Looking at the precious metals’ technical outlook, Alex Kuptsikevich, Senior Market Analyst at FxPro, said that the renewed momentum in gold and silver comes after both metals managed to hold key retracement levels.

“This week's upward momentum revives the idea that the decline in the second half of April was a corrective pullback,” he said.

However, Kuptsikevich added that although gold and silver are seeing robust moves higher, a lot of work still needs to be done to attract new capital and drive prices above the recent all-time highs above $2,448 an ounce.

“A further rise in the price of gold with high bond yields in developed countries, huge budget deficits in many countries, and the need to support the economy makes one think that the upside potential is limited,” he said. “Until gold and silver reach a new level, we doubt the success of a new attack on the highs and see the potential for a renewed decline.”

Although gold could continue to consolidate, Peter Granditch, renowned Financial Analyst and market strategist, said that risks for gold and silver remain to the upside as interest rates have peaked due to weakening economic activity. However, he added that investors should be patient.

“I’m hard-pressed to think gold can get much below its recent lows while the upside remains hundreds of dollars (if not more) higher,” he said in a comment to Kitco News. “I don’t think this leg up will be as hard and as fast as the one we saw earlier his year, but my long-standing target of $2,536 is most reachable this year.”

With renewed attention on economic fundamentals, some analysts note that next week will be critical to gold and silver’s potential recovery and drive to record highs.

Next week's main economic event will be the April Consumer Price Index after the Federal Reserve signaled that its fight against inflation has been insufficient as prices remain well above its 2% target.

“If [consumer] prices rise more strongly once more, the recent slight rise in interest rate hopes is likely to be dampened again. Gold should then fall back again,” said Barbara Lambrecht, precious metals analyst at Commerzbank, in a note Friday.

Along with U.S. CPI data, some economists have said that after the disappointing consumer sentiment data on Friday, U.S. retail sales data will also garner some market attention. Traditionally, consumers who are less optimistic about the health of the economy spend less, which will weigh on economic activity.

“The renewed slump in the University of Michigan consumer sentiment gauge to a six-month low is hard to explain given that gasoline prices are now falling again, the stock market is back close to a record high, and there is little evidence of any major downturn in the labor market,” Paul Ashworth, Chief North America Economist at Capital Economics, said in a note. “That leaves us wondering if we’re missing something more worrying going on with the consumer. We don’t think so, but next week’s April retail sales figures will provide more insight.”

Economic data to watch next week:

Tuesday: U.S. PPI, Federal Reserve Chair Jerome Powell to speak in Amsterdam, Netherlands

Wednesday: U.S. CPI, U.S. retail sales, New York Fed Empire State Survey

Thursday: U.S. weekly jobless claims, U.S. building permits housing starts, Philadelphia Federal Reserve manufacturing survey

Kitco Media

Neils Christensen

Time to Buy Gold and Silver

Tim Moseley

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