(Kitco News) - Although gold prices have been unable to break initial resistance above $4,200, one market strategist expects the worst of the selling pressure from the months-long correction may now be over.
In his latest precious metals note, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said he believes the price action in the gold market is shifting from liquidation to consolidation and base-building.
“The sector has moved from being aggressively bid to selectively accumulated, and the next move will likely depend on whether macro conditions continue to ease or once again turn hostile,” he said in his Monday note.
Hansen added that gold continues to be driven by market expectations surrounding U.S. monetary policy. Although markets still expect the U.S. central bank to raise interest rates this year, aggressive forecasts have been pared back following last week’s disappointing employment data, which showed that only 57,000 jobs were created in June.
At the same time, gold is also benefiting from optimistic comments from Federal Reserve Chair Kevin Warsh, who emphasized his commitment to price stability and returning inflation to the central bank's target. However, he also said inflation risks had eased in recent weeks since taking over leadership of the Federal Reserve.
In a comment to Kitco News, Hansen said he does not expect the Federal Reserve to raise interest rates this year as inflation pressures continue to ease, in line with Warsh’s comments.
“Forward inflation expectations have collapsed, so tightening when the reason for tightening is easing with energy prices slumping makes no sense. Once that becomes the general market view, the dollar will soften as a very elevated long gets squeezed while short-end bond yields will move back towards Fed Funds rates,” he said.
However, until the Federal Reserve’s policy path becomes clearer, Hansen said gold still has a lot of ground to recover, with prices remaining 26% below January’s highs.
“Support below USD 4,000 has held so far, but the rebound towards USD 4,200 last week was met with renewed selling, indicating that some investors are still using strength to reduce exposure. Such price action is typical after a deep correction and helps explain why building a durable market trough can take time,” he said. “On the charts, the 200-day moving average near USD 4,485 represents the first major hurdle. Above that, the 38.2% retracement of the roughly USD 1,650 January-to-June correction sits near USD 4,574. A break above these levels would further improve the technical picture. Until then, the recovery is better viewed as an attempt to build a base."
Along with growing optimism toward gold, Hansen said he is also encouraged by the recent price action in silver, even though prices on Monday were capped at $63.27 an ounce.
“Silver’s latest sell-off was arrested ahead of key support in the mid-USD 50s, with the subsequent rebound taking prices back above USD 60. The move is encouraging, but like gold, silver still has considerable work to do to repair the technical and psychological damage inflicted during the past few months.
Silver combines gold’s macro sensitivity with a tighter fundamental backdrop. Multi-year supply deficits and growing industrial demand provide structural support, but the market is much smaller and more flow-sensitive than gold. That makes silver particularly attractive to momentum-driven investors when conditions improve, while also exposing it to sharper liquidation when sentiment reverses,” he said.
