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

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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 falling bond yields; however, shifting risk sentiment, as equity markets end their seven-week losing streak with a 6% rally, presents a new headwind for the precious metal.

The gold market managed to hold steady around the critical psychological level of $1,850 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 is down 3% from its 20-year high.

Meanwhile, bond yields have fallen to 2.74%, more than 13% below their recent highs above 3%.

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

“The missing piece is that equities are entering a vicious short-covering rally now and there is limited panic about a recession, stock crash or Fed hike,” he said.

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

Some economists have said the inflation data gives the Federal Reserve some room to raise interest rates less aggressively in the fall and through the end of the year. On Wednesday, the Federal Reserve signaled that it seeks 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 as inflation pressures are far from over, ultimately supporting gold.

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

Phillip Streible, chief market strategist at Blue Line Futures, said he sees the jump in equity markets as a classic bear market rally. He added that he too views gold as a critical haven asset.

“Technically, gold at $1,850 an ounce looks good,” he said. “Not only did gold make a solid rebound from last week’s low, but its measure of volatility has fallen. Gold does well when it sees low volatility. Investors are drawn to that stability when there is uncertainty everywhere. parts”.

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

While inflation may have peaked, Bark Melek, chief commodity strategist at TD Securities, said it will remain quite tough through 2022.

“It’s probably more of an illusion that inflation drops significantly and the Federal Reserve stops 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 still likes to sell rallies in the gold market.

Some analysts have pointed out that a plateau in inflation within the Fed’s aggressive tightening cycle will push real yields higher, making gold less attractive as a non-yielding asset.

“On gold in particular, the US TIPS yield is now comfortably in positive territory, which will reduce investment demand for gold as it offers no return,” said commodity economists at CapitalEconomics.

US data provides little direction for 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 Non-Farm Payrolls report to see how the labor market performs in the current economic environment.

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

Economists have said the central bank appears willing to advance 50 basis points in the next two policy meetings, no matter what the data says.

next week data

Tuesday: US consumer confidence

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

Thursday: ADP Nonfarm Employment Change

Friday: USA non-farm payrolls; ISM Service Sector PMI

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths 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. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.

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