(Kitco News) - Gold futures have hit their highest level in a year as they draw safe-haven buying, basically getting support from “everything under the sun” amid another round of risk aversion.
Some observers see potential for the metal to rise to the next big round number of $1,300 an ounce.
As of 10:53 a.m. EST Thursday, the Comex April contract was $53 higher at $1,247.60 an ounce. Gold peaked at $1,249.
When asked what’s providing the fuel for soaring prices, Afshin Nabavi, head of trading with MKS (Switzerland) SA, responded with “everything under the sun.”
He then went on to cite weaker oil prices, global equities undergoing another rout and a plunging U.S. dollar. He suspects continued buying is occurring for gold-backed exchange-traded funds.
“The whole world is panicked,” Nabavi said. “The safe-haven (appeal) is coming back into gold.”
Phil Flynn, senior market strategist with Price Futures Group, cited widespread risk aversion and an apparent lack of market confidence in central bankers’ ability to control the economy.
When the Federal Reserve hiked U.S. rates in late 2015 for the first time in nearly a decade, there was bearishness toward gold on expectations for more tightening in 2016. This is because hikes were expected to boost the dollar, which tends to hurt gold due to their inverse relationship. But since, the interest-rate market has essentially taken away expectations for any further U.S. tightening this year.
“There is nervousness in the market,” Flynn said. “You are seeing the banking stocks really take a big hit. There are concerns about Deutsche Bank and other banks. When you have a lack of confidence in banks, people are running to gold.”
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Rate-hike expectations were knocked down by not only the correction in the stock market, but also by weaker energy prices, seen as a harbinger of a weak economy, said Kevin Grady, president of Phoenix Futures and Options LLC on the Comex floor. Additionally, with a move toward negative interest rates in Europe, there are market perceptions that there is little else that policymakers can do to jump-start the economy.
If there is an ingredient missing in the current gold rally, it would be physical demand, Nabavi added. This appears to have abated as buyers pause after the recent sharp run-up in prices, as many of these purchasers are known to be price-sensitive. Also, many Asian market participants are still sidelined by week-long Chinese New Year festivities, he explained.
“Should (physical buying) return, then we could really be looking at much, much higher prices,” Nabavi added.
Activity in the gold market at the beginning of next week could be a “very, very interesting” as traders watch to see how Chinese market participants respond to higher prices upon their return, he added.
In the meantime, some chart resistance could occur around $1,250, Nabavi said. Further, he added, should any news break supportive of the U.S. dollar or equities, gold likely would be vulnerable to a pullback at least in the short term.
Grady commented that despite the sharp rally in gold, open interest – which is the number of open futures positions at the end of the business day – still remains relatively low. This is a sign that the gold market is not necessarily overbought, meaning there is potential for further buying, he explained.
Flynn also sees potential for the rally to continue.
“From a technical viewpoint, we’ve broken out. We hit a new high for the year,” he said. “This $1,200-an-ounce area was a huge resistance (that has now failed)…. I would think a test of $1,300 or higher, or maybe $1,350, is not out of the question.”
By Allen Sykora of Kitco News; asykora@kitco.com
