The uptrend in gold prices might not be able to outlast the winter as bond yields surged higher into the weekend, increasing the yellow metal's opportunity costs.
Friday, Punxsutawney Phil, the famous weather pontificating groundhog, saw his shadow, which means there is still six more weeks of winter left. With gold prices looking to end the week in negative territory, analysts say that gold could be entering a consolidation phase, faced with an uncertain outlook.
"I'm bullish on gold in the near-term. I don't think the gold market is done just yet but prices need to push above the January highs by the end of the month, or it will be time to sell," said Adam Button, senior currency strategist at Forexlive.com.
The seven-week uptrend in gold appears to be losing momentum as the market is closing the book on its worst week since early December. April gold futures last traded at $1,338.90 an ounce, down more than 1% since last Friday.
The silver market is also seeing significant selling pressure with prices falling below the critical psychological level at $17 an ounce. March silver futures last traded at $16.78 an ounce, down almost 4% since last week.
Something strange is going on in the financial system. And according to The Wall Street Journal, it's causing some investors to move massive amounts of money out of the banking system.
Looking ahead, commodity analysts said that in the near-term they are keeping an eye on rising bond yields and a strong U.S. dollar, both are negative for the gold market. However, while prospects look gloomy, there is still some hope in that gold can hold critical levels in the near-term.
U.S. 10-year bond yields pushed to a new multi-year high Friday above 2.8% after the U.S. Labor Department reported stronger-than-expected employment gains as the U.S. economy created 200,000 jobs in January. At the same time wages saw an annual increase of 2.9%, its most significant yearly rise since 2009.
Not only did bond yields jump higher -- with some analysts now expecting yields to rise above 3% eventually -- but the U.S. dollar has bounced off recent three-year lows.
"As yields move higher that will push the U.S. dollar up and both factors will be a drag on gold in the near-term," said Ole Hansen, head of commodity strategy at Saxo Bank.
However, Hansen added that this is a healthy correction in gold.
"I don't see a collapse in gold. When the dust settles, there are still underlying reasons to own gold," he said.
3% Bond Yields Is Not That Scary
Although gold traders could see some "sticker shock" as 10-year bond yields continue to rise, Maxwell Gold director of investment strategy at ETF Securities, said that higher yields don't necessarily mean the end for the gold rally.
"While bond yields are rising we see inflation and inflation expectations pick up, so real rates are still really tame," he said. "Low real rates will remain supportive for gold."
Gold added that the U.S. dollar, while off its lows, is not seeing significant momentum. He said that it's surprising the U.S. Dollar Index is not higher after what some economists have called a "stellar" employment report.
"This is an indication that investors are worried about growing budget deficits," he said. "Ultimately, I don't think this is a bad environment for gold."
U.S. Dollar Up, But Not High Enough
Button said that he is also watching the U.S. dollar, saying that the index needs to end the week at a session high.
"If the U.S. dollar can't end the week on a high in this market then that is another reason to sell it," he said. "The data has been good for a while, but it hasn't helped the U.S. dollar."
Lukman Otunuga, research analyst at FXTM, said that technically the U.S. Dollar Index still has a way to go before it regains its bullish momentum.
"Prices remain at risk of depreciating back below 89.00 if bulls are unable to break above the 89.60 level. Sustained weakness below 89.00 may invite decline back towards 88.50," he said.
Darin Newsom, senior analyst at DTN, said that he could see further gains in the U.S. dollar, which will weigh on gold in the near-term.
"The U.S. dollar just looks oversold and is set to turn around for a while," he said.
Equity Market Correction Is Supportive For Gold
Not only are investors getting out of the bond markets as yields are inversely correlated to demand and prices, but higher interest rates are also spooking equity markets, according to some analyst.
The S&P 500 index is ending its worst week since February 2016 as it prepares to end the week down almost 3%.
Both Hansen and Gold said that with investor capital fleeing equities and bond markets, alternative assets like commodities, and in particular gold, start to look attractive.
Levels To Watch
Although gold is seeing renewed selling pressure, the market continues to hold critical support levels. Many analysts are watching essential support between $1,325 an ounce and $1,320 an ounce; a break below that area could eventually push prices to $1,300 an ounce.
"$1,301.80 is a key level to keep an eye on as it represents the 50% retracement level from the previous level," said Newsom. "That level would also represent a new four-week low."
On the upside, many analysts say that gold needs to push above its January high to regain its momentum.
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