Will the price of gold benefit from a traditional bear market rally in stocks?

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(Kitco News) – There is a new battle in the gold market as the precious metal continues to benefit from a weaker US dollar and lower bond yields; However, changing risk sentiment, as equity markets ended their seven-week losing streak with a 6% rise, presents new headwinds for the precious metal.

The gold market was able to stabilize around the psychologically critical $1,850 level this week as the US dollar fell from its highs earlier in the month. The US Dollar Index ended the week below 102 points and down 3% from a 20-year high.

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

Nikki ShilsThe head of metals strategy at MKS PAMP Group said that weak US dollar and lower bond yields could help gold rise strongly above $1,850 in the abbreviated trading week. However, she added, risk sentiment among equity investors would be a wild card.

“The missing piece is that stocks are in a vicious recovery now and there is limited panic about a recession, stock crash or Fed rally,” she said.

According to some market analysts, risk sentiment in the market has improved inflation fears. Investors breathed a little easier on Friday after the US Commerce Department said annual inflation rose 4.9% last month, down from 5.2% in March and from February’s peak of 5.3%. Inflation fell in line with market expectations.

The data also indicated healthy consumption; However, economists point out that American consumers continue to indulge in their COVID-19 savings, which may be unsustainable.

Some economists said the inflation data gives the Fed some room to raise interest rates less sharply in the fall and into the end of the year. On Wednesday, the Federal Reserve indicated that it is looking to raise interest rates by 50 basis points in the next two meetings, in line with market expectations.

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

“Energy prices continue to rise and are going to drive up inflation pressures,” said Sean Lask, co-manager of hedge trading with Walsh Trading. “Inflation will add to mounting recession fears, making gold an attractive and safe haven asset.”

Philip Strebel, chief market strategist at Blue Line Futures, said he sees the jump in stock markets as a classic bear market rally. He added that he also considers gold to be an important safe-haven asset.

“Technically speaking, holding gold at $1,850 an ounce looks good,” he said. “Not only has gold seen a strong bounce off last week’s low, but the volatility gauge is down. Gold does well when it sees low volatility. Investors are drawn to this stability when there is uncertainty all around.”

Not all analysts are optimistic that gold prices will be able to maintain the streak at $1,850 an ounce.

While inflation may have peaked, Park Mellick, head of commodity strategy at TD Securities, said it will remain fully flat until 2022.

“It’s probably a security thinking that inflation will drop significantly and the Federal Reserve will stop raising interest rates aggressively,” he said. “The Fed will continue to raise interest rates and that will be negative for gold.”

Malak added that he still likes to sell advances in the gold market.

Some analysts note that stabilizing inflation within the Fed’s tight cycle will push real yields higher, making gold less attractive as a non-yielding asset.

“Looking at gold, in particular, the US TIPS yield is now comfortable in positive territory, which will reduce investment demand for gold as it does not provide a return,” said commodity economists at Capital Economics.

US data provides little guidance to the markets

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

On Friday, economists and analysts will be keen to see the latest non-farm payrolls report to see how the labor market is swinging in the current economic environment.

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

Economists said the central bank appears ready to move 50 basis points in the next two monetary policy meetings, regardless of what 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: America non-farm jobs; ISM Services Sector PMI

Disclaimer: The opinions expressed in this article are those of the author and may not reflect the opinions of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, Kitco Metals Inc. cannot. Nor does the author guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to conduct any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. does not accept The author of this article will be liable for losses and/or damages arising from the use of this publication.

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