Gold retreats as “king dollar” returns, but risk events still loom – Commodity News
May 3, 2018 12:25 pm
The past few weeks have not been kind to gold prices, which touched their lowest level in four months on Tuesday, as a cocktail of fading risks on the Korean peninsula and a recovering dollar curbed demand for the precious metal. While a resurgent dollar continues to pose downside risks for gold, there are several other political and geopolitical risk events that have the capacity to push prices higher should they materialize, most notably a potential escalation of tensions with Iran.
Gold, as several other commodities, is denominated in US dollars. This implies that when the dollar appreciates in value, the yellow metal becomes more expensive to buy for investors using foreign currencies, which decreases its appeal. In other words, the greenback and gold are inversely related. And while the dollar had been trading sideways since early-January, it started to soar back higher in April amid speculation that the Fed may hike rates more aggressively than previously expected, thereby exerting downward pressure on gold prices.
Turning to geopolitics, tensions on the Korean peninsula appear to be easing rapidly. In a moment for the history books, Kim Jong Un entered South Korea for peace talks last week, marking the first time a North Korean leader stepped into the South in more than six decades. By the end, the two sides pledged to work towards a complete denuclearization of the peninsula, and to sign a peace treaty to formally end their war.
Playing devil’s advocate here, a skeptic would argue that such positive gestures have occurred in the past too but amounted to little in the end, so caution is warranted until – and if – talk turns to action. Still, from the market’s perspective, these calls for peace ignited speculation the situation may soon calm down, reducing geopolitical risk premium and weighing on demand for safe havens like gold. The other major risk that faded in recent weeks relates to Syria, and the now-distant possibility of a US-Russia military standoff over that nation.
What does the future hold for gold? In terms of downside risks for prices, the most notable one is the prospect of further appreciation in the US dollar. Should the US currency continue to move higher, perhaps on strong economic data and expectations for faster rate hikes by the Fed, then more pain may be in store for the yellow metal over the coming weeks.
On the other hand, there are also several risk events that could trigger sharp gains in prices should they materialize. The most noteworthy relates to Iran. Markets seem to be positioned for the US to withdraw from the nuclear deal on May 12, and if it does, the imposition of additional sanctions on Iran could lead the nation to threaten restarting its nuclear program, thereby raising geopolitical uncertainty. Elsewhere, the trade tensions between the US and China subsided recently, but haven’t vanished. Note that US Treasury Secretary Mnuchin is currently in China for negotiations, and in case the two sides fail to reach an accord, it wouldn’t be surprising to see a re-escalation in the trade spat as the US continues attempting to “strongarm” China into making concessions. Finally, the Mueller investigation on Russia meddling in 2016’s elections is still ongoing and should it heat up any further – to the extent that it increases US political uncertainty – it may benefit gold.
In terms of technical levels to watch, the area around the round figure of $1,300 is likely to act as the proverbial “line in the sand” for gold prices. It has halted all of gold’s declines so far in 2018, confirming its validity as a support level. A clear close below it would be a negative signal that increases the probability for further declines. Conversely, continued rebound from there could increase the likelihood of further advances.
In the scenario that gold prices rebound from current levels, resistance may be found initially near the $1,321 hurdle, marked by the lows of April 23. An upside break could open the way for the April 24 high of $1,333, with further advances likely to stall near $1,356, the April 18 top.
On the downside, immediate support to declines could come at the May 1 low of $1,301, with the area around it also encapsulating the psychological number of $1,300. Further down, the $1,290 and the $1,284 levels could come into play, identified by the peaks on November 9 and 2 respectively.
The past few weeks have not been kind to gold prices, which touched their lowest level in four months on Tuesday, as a cocktail of fading risks on the Korean peninsula and a recovering dollar curbed demand for the precious metal. While a resurgent dollar continues to pose downside risks for gold, there are several other political and geopolitical risk events that have the capacity to push prices higher should they materialize, most notably a potential escalation of tensions with Iran.
Gold, as several other commodities, is denominated in US dollars. This implies that when the dollar appreciates in value, the yellow metal becomes more expensive to buy for investors using foreign currencies, which decreases its appeal. In other words, the greenback and gold are inversely related. And while the dollar had been trading sideways since early-January, it started to soar back higher in April amid speculation that the Fed may hike rates more aggressively than previously expected, thereby exerting downward pressure on gold prices.
Playing devil’s advocate here, a skeptic would argue that such positive gestures have occurred in the past too but amounted to little in the end, so caution is warranted until – and if – talk turns to action. Still, from the market’s perspective, these calls for peace ignited speculation the situation may soon calm down, reducing geopolitical risk premium and weighing on demand for safe havens like gold. The other major risk that faded in recent weeks relates to Syria, and the now-distant possibility of a US-Russia military standoff over that nation.
What does the future hold for gold? In terms of downside risks for prices, the most notable one is the prospect of further appreciation in the US dollar. Should the US currency continue to move higher, perhaps on strong economic data and expectations for faster rate hikes by the Fed, then more pain may be in store for the yellow metal over the coming weeks.
On the other hand, there are also several risk events that could trigger sharp gains in prices should they materialize. The most noteworthy relates to Iran. Markets seem to be positioned for the US to withdraw from the nuclear deal on May 12, and if it does, the imposition of additional sanctions on Iran could lead the nation to threaten restarting its nuclear program, thereby raising geopolitical uncertainty. Elsewhere, the trade tensions between the US and China subsided recently, but haven’t vanished. Note that US Treasury Secretary Mnuchin is currently in China for negotiations, and in case the two sides fail to reach an accord, it wouldn’t be surprising to see a re-escalation in the trade spat as the US continues attempting to “strongarm” China into making concessions. Finally, the Mueller investigation on Russia meddling in 2016’s elections is still ongoing and should it heat up any further – to the extent that it increases US political uncertainty – it may benefit gold.
In terms of technical levels to watch, the area around the round figure of $1,300 is likely to act as the proverbial “line in the sand” for gold prices. It has halted all of gold’s declines so far in 2018, confirming its validity as a support level. A clear close below it would be a negative signal that increases the probability for further declines. Conversely, continued rebound from there could increase the likelihood of further advances.
In the scenario that gold prices rebound from current levels, resistance may be found initially near the $1,321 hurdle, marked by the lows of April 23. An upside break could open the way for the April 24 high of $1,333, with further advances likely to stall near $1,356, the April 18 top.
On the downside, immediate support to declines could come at the May 1 low of $1,301, with the area around it also encapsulating the psychological number of $1,300. Further down, the $1,290 and the $1,284 levels could come into play, identified by the peaks on November 9 and 2 respectively.
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