Gold Price Forecast: Emerging-Market Fears Underpin Demand

Volatility is likely to remain higher in the week ahead amid a lack of liquidity, and emerging-market fears will likely underpin gold. Positioning data should increase the potential for strong support near $1,200 per ounce, with sharp gains if the U.S. administration talks down the dollar.

Gold registered small net losses for the week, the fifth successive decline, with a further test of support below $1,210 per ounce. Prices did, however, avoid fresh 2018 lows and were also notably resilient late in the week. In particular, gold registered only slight losses late in the week despite sharp gains in the U.S. dollar and a EUR/USD slide to 12-month lows. Gold tends to lose ground when the dollar strengthens, but precious metals secured protection from weaker risk appetite after a slump in Turkish markets.

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Emerging-market trends will continue to be a very important focus during the week ahead. If stresses intensify and spread to more countries, there will likely be a further net deterioration in risk appetite. Fragile risk conditions tend to boost gold demand, although the impact would be offset by a generally strong dollar.

Wider U.S. currency trends will again be a key market influence during the week ahead, although the direct impact of U.S. data may be limited. The retail sales data release is scheduled for Wednesday following very solid spending growth for the second quarter. The latest data on labor costs will be released at the same time and could have a larger market impact given the inflation implications.

Business confidence data will also be important and could have a pivotal impact on sentiment, with markets looking for fresh evidence on potential trends in growth and prices. The New York Empire manufacturing data is due on Wednesday, with the Philadelphia Fed index on Thursday. Other releases include constriction data on Thursday and the University of Michigan consumer confidence index on Friday. Data overall should underpin the dollar without providing additional support.

Comments from Federal Reserve officials will be monitored closely to assess whether there is increased pressure for a pause in rate hikes. Given that markets have priced in over a 90% chance of a September rate hike, the dollar would be liable to dip sharply on any shift in rhetoric.

Rhetoric from U.S. President Trump and Treasury officials will also need to be watched closely, especially if the dollar strengthens further. There is an important risk that fresh U.S. gains would trigger verbal intervention and a warning against currency manipulation. Traditional correlations could be under stress, although the most likely outcome would be significant gold gains on a U.S. currency retreat. Global trade developments will also have a significant influence, with any shift toward a more conciliatory approach and progress toward a NAFTA deal likely to underpin risk appetite and weaken gold support.

The latest CFTC data recorded a fourth successive weekly decline in the net long, non-commercial gold position with a sharp retreat to below 13,000 from just over 35,000 contracts previously. This is the lowest long positioning since early December 2015, when gold traded below $1,100 per ounce. The net positioning shift should lessen the risk of further aggressive selling and strengthens the case for a significant base being in place.

A lack of liquidity will continue to be an important market factor as the U.S. and European summer holiday season reaches a peak. The risk of erratic trading across all asset classes including precious metals will likely persist, with underlying volatility liable to increase. A lack of liquidity will also magnify the impact of large commercial orders and increase the threat of volatility, especially in periods when low volumes are always a feature such as late in U.S. trading.

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