(Kitco News) - All eyes will be on the U.S. dollar next week, although expected illiquidity in the gold market could mean increased volatility, traders and analysts said.
Traders also will be watching to see if a double-bottom so far this month holds on the charts and if so, whether that induces short covering or bargain hunting.
Gold fell this week, with the bulk of the decline coming on Thursday and widely blamed on a surge in the U.S. dollar a day after the Federal Open Market Committee hiked U.S. interest rates for the first time in nearly a decade. Comex February gold lost $8.70, or 0.8%, for the week to $1,065. The metal was down even more on Thursday before bouncing Friday on short covering bounce, bargain hunting and a retreat in the U.S. dollar index.
Participants in a pair of Kitco surveys are mixed on the direction for gold next week. In an online survey of retail investors, 136 respondents, or 42%, are bullish, while 143 people (44%) are bearish and 43 (13%) are neutral. Of 17 participants in a survey of market professionals, eight (47%) expect higher prices next week, while six (35%) see lower prices and three (18%) are neutral.
Around 1:30 p.m. EST, the March U.S. dollar index was at 98.900, up 1.294 points for the week. Gold often moves inversely to the U.S. currency.
“I’ll be looking at the behavior of the dollar and the after-effects of the rate hike,” said George Gero, vice president with RBC Capital Markets Global Futures, on what he sees as the key market driver next week. “I’ll be looking for any more clues on (the future of) monetary policy.”
A heavy slate of U.S. economic data is on the calendar during the middle of a holiday-shortened week, including gross domestic product and existing home sales Tuesday, followed by personal income and spending, durable-goods orders, consumer sentiment and new home sales on Wednesday. Weekly jobless claims are set for Thursday.
Typically, when data are strong, it supports the U.S. dollar, which in turn often hurts gold. However, in the current environment, there is also a chance that strong data could prompt selling in stocks, leading some of those investors back into gold, said Sean Lusk, director of commercial hedging with Walsh Trading. This is because strong data might spark fears of more aggressive rate hikes from the FOMC than market participants currently expect.
Further, Lusk added, this could prompt concerns about inflation. Gold is often bought as a hedge against rising prices across the wider economy.
Western markets will closed next Friday for Christmas, and trade is expected to be thin ahead of time, with many traders taking extra time off, observers said. That might have some impact on the market since greater volatility can occur in thin markets.
“The only thing that will be moving market is going to be the illiquidity of the market, if anything,” said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA.
If somebody were to take out a big position, there may be little interest in taking the other side, Nabavi explained. That in turn means potential for a bigger move in prices than otherwise might be the case.
“The market could have a $5, $6 or $10 move up or down without any reason,” Nabavi explained. “If the market goes up 10 bucks, once the actual trade is done, it would probably go back down where it was. That’s the illiquidity for the market.”
Otherwise, barring any unexpected news, he looks for gold to remain within the range from recent days.
“I wouldn’t be surprised if we had a little bit of a short-covering rally,” Lusk said. With gold not far from multi-year lows, many traders have short, or bearish, positions. With the end of quarter and year approaching, some of traders will be looking to buy in order to cover or offset those positions, Lusk explained.
Technically, Gero and Lusk said, gold traders will be watching a double-bottom so far this month. The February futures fell as far as $1,045.40 on Dec. 3, then held just above this on Thursday’s pullback to $1,046.80. The roughly $1,045 bottom was the lowest level since early 2010, based on a futures continuation chart.
Traders said a break below this area could trigger sell stops, which are pre-placed orders activated when certain chart points are hit. However, Lusk added, should this support level hold, some market participants might be encouraged to do some bargain hunting or even up short positions.
“Every time we’ve made a low this fall…we’ve had a decent pop up of $40 or $50 over the next couple of weeks,” Lusk said.
By Allen Sykora of Kitco News; asykora@kitco.com
