Will the price of gold benefit from the classic equity bear market rally?

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(Kitco News) – There’s another battle in the gold market as the precious metal continues to benefit from a weaker US dollar and falling bond yields; However, shifts in risk sentiment as equity markets end their seven-week losing streak with a 6% rally present fresh headwinds for the precious metal.

The gold market managed to hold around the critical psychological level of $1,850 this week as the US Dollar fell from its early month highs. The US dollar index ended the week below 102 points and is down 3% from its 20-year high.

Meanwhile, bond yields fell to 2.74%, down more than 13% from their recent highs above 3%.

Nicky Shiels, head of metals strategy at MKS PAMP Group, said US dollar weakness and falling bond yields could help gold push solidly above $1,850 in the shortened trading week. However, she added that risk sentiment among equity investors will be a wild card.

“The missing piece is that stocks are now entering a vicious short-hedging rally and there is limited panic about a recession, stock market crash or Fed hikes,” she said. declared.

According to some market analysts, risk sentiment in the market has improved and inflation fears have subsided. Investors breathed a little better on Friday after the US Commerce Department said annual inflation rose to 4.9% last month, from 5.2% in March and peaking at 5.3% in February. . Inflation declined in line with market expectations.

The data also reported healthy consumption; however, economists note that US consumers continue to dip into their COVID-19 savings, which may be unsustainable.

Some economists said the inflation data gave the Federal Reserve leeway to raise interest rates less aggressively in the fall and later in the year. On Wednesday, the Federal Reserve signaled that it plans to raise interest rates by 50 basis points at the next two meetings, in line with market expectations.

However, for many analysts, the current risk sentiment is not sustainable as inflationary pressures are far from over, ultimately supporting gold.

“Energy prices continue to rise and will drive up inflationary pressures,” said Sean Lusk, co-director of trade coverage at Walsh Trading. “Inflation will add to growing recession fears, making gold an attractive safe-haven asset.”

Phillip Streible, chief market strategist at Blue Line Futures, said he viewed the stock market jump as a classic bear market rally. He added that he also sees gold as a key safe-haven asset.

“Technically, gold holding $1,850 an ounce looks good,” he said. “Not only has gold had a strong rebound from last week’s low, but its measure of volatility has fallen. Gold does well when it experiences low volatility. Investors are drawn to this stability when there is uncertainty everywhere.”

Not all analysts are bullish that gold prices will be able to hold the line at $1,850 an ounce.

Although inflation may have peaked, Bark Melek, head of commodities strategy at TD Securities, said it will remain fairly sticky through 2022.

“It’s probably more of a delusion to think that inflation is going to come down significantly and that the Federal Reserve is going to stop aggressively raising interest rates,” he said. “The Fed will continue to raise interest rates and that will be negative for gold.”

Melek added that he always likes to sell rallies in the gold market.

Some analysts have noted that a plateau in inflation in the Federal Reserve’s aggressive tightening cycle will push real yields higher, making gold less attractive as a non-performing asset.

“With respect to gold, in particular, the US TIPS yield is now comfortably in positive territory, which will dampen investment demand for gold given that it offers no yield,” they said. the commodity economists at Capital Economics.

US data provides little direction to markets

Although US markets are closed on Monday for Memorial Day, it will be a busy week for economic data.

On Friday, economists and analysts will be eager to see the latest nonfarm payrolls report to see how the labor market is performing in the current economic environment.

While the main data reports will be released next week, market analysts said they will have little impact on interest rate expectations.

Economists said the central bank is expected to advance 50 basis points in the next two monetary policy meetings, whatever the data says.

Next week’s data

Tuesday: US consumer confidence

Wednesday: Bank of Canada monetary policy decision; ISM Manufacturing PMI

Thursday: ADP non-farm employment change

Friday: United States non-agricultural wages; Services sector ISM PMI

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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