Over the past two months, gold prices have remained largely on the upward trend as market behavior rather than fundamental factors continue to influence global economic growth. However, market analysts in London and New York continue to expect an impending moderation in U.S. interest rates that will be accompanied by a strengthening of the dollar. This may result in higher gold prices.
In continuation of this sentiment, gold market analysts in New York and London believe that the U.S. dollar may remain on a weak exchange rate versus other major currencies until the end of the year. In order for the U.S. dollar to regain the top spot, which currently is held by the British pound, the EUR/USD (the euro against the dollar) must weaken by at least 1.5% over the course of the coming month. If this occurs, making another attempt to break above the psychologically established psychological level of support will prove abortive. Gold prices will likely remain on a marginal basis over the coming two months. However, higher price action may push the price of gold higher over the coming twelve months.
On a brighter note, investors in London and New York should remain patient while the U.S. Federal Reserve continues its rate hike process. The European Central Bank (ECB) has also shown restraint so far, despite recent reports indicating that the economy in the region may be on the verge of financial breakdown. Should these factors propel the U.S. dollar to weaken versus all other major currencies, a stronger U.S. dollar will make gold price more attractive. Making another attempt to break the psychological level of support would be futile given that there are no structural supportive indicators present. Therefore, investors may continue to buy gold as the U.S. dollar weakens versus other major currencies.
In addition, gold prices may continue to rise as the global economic recovery process matures. Economic data released over the past few weeks has provided some evidence that the U.S. economy is nearing a “recession-like” stage. While the U.S. economy is not in a recession, the data does indicate that it is nearing a “jobless” stage, with more job cuts anticipated in coming quarters. Meanwhile, inflation continues to rise above the Fed’s 2% target. Inflation may continue to rise, and the effects of increases in base interest rates worldwide will continue to erode investor confidence. The specter of rising inflation and rising asset and commodity rates will continue to exert pressure on U.S. equity and commodity markets.
Gold prices may continue to rise as investors remain uncertain about the outlook for the U.S. economy, global financial conditions, and the prospects for stimulus measures or intervention by the Fed. In addition, market participants remain uncertain about the sustainability of the current level of interest rates. And although market participants expect the U.S. economy to slow from its current rate of inflation and high unemployment rate, monetary policy makers are concerned that continued accommodative monetary policy may not be sustainable over the long run.
With these concerns in mind, investors may continue to invest in the precious metal rather than wait for the indicators to become clear. Traders who buy gold and hold their positions over time are able to benefit from an environment that provides the relative strength that is required for the market to make a substantial move. At this point, gold prices are likely to remain near the levels of previous years. On the flip side, if these buyers begin to believe that they may no longer be able to obtain this premium from gold purchases, gold prices may begin to decrease.
Gold dealers anticipate that a key period of resistance will occur around the start of the third quarter of this year. At this point, they believe that market participants will regain their confidence in the U.S. economy and start to increase their buying pressure on the precious metal once again. When this happens, market participants will realize that they can purchase additional quantities of gold without having to pay the elevated costs of physical purchases. Traders that trade with the bearish trend may benefit from entering a consolidation trade as early as possible in order to take advantage of the higher liquidity levels that are expected to be present during this period. And when market participants begin to anticipate that the first measures of quantitative easing are coming to deal with current financial problems, this can prompt them to take advantage of this period of strong bullion prices.
However, the same scenarios could play out under a different scenario. In the event that the U.S. economy continues to falter or experience significant slowdowns, the gold price may begin to increase. If investors begin to question the reliability of the U.S. dollar, the yellow metal may become overpriced and send the market to a correction. Traders may be forced to sell out if th