Commodities

Can upcoming risk events break gold out of its lull? – Commodity News

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Gold prices have continued trading in a quiet manner, unable to break the narrow range that has been established in recent weeks. While the geopolitical arena seems to be posing less of a risk for markets, developments around global trade have not been as encouraging, leaving investors with little motivation to alter their exposure to havens like gold. That might change soon though, depending on how the US-North Korea summit and the upcoming Fed meeting play out, alongside whether the White House will finally impose another round of tariffs on China.

“Quiet as a mouse” is an excellent portrayal of recent price action in gold. Prices have remained stuck in a very narrow range – between $1282 and $1307 – for three weeks now, as risk-off developments that would typically raise demand for the precious metal were counterbalanced by a strengthening dollar. Gold – which is priced in dollars – tends to weaken when the US currency appreciates, as it becomes more expensive for investors using foreign currencies to buy it. When the dollar started to correct a little lower last week though, concerns around political developments began to ease somewhat as well (particularly in Italy), helping to limit any major reaction in gold.

Looking at recent developments, the global trade outlook has grown even more uncertain, and the situation looks likely to deteriorate further before it improves. Whereas things were looking rosy a couple of weeks ago, with the US and China citing progress in talks and Treasury Secretary Mnuchin saying “we are putting the trade war on hold”, the White House soon ‘ruined the party’ by announcing it is considering $50bn worth of tariffs on Chinese goods. The US will announce on June 15 which products will be targeted. Unless the US backs off by then, China is likely to strike back with its own measures in tit-for-tat fashion, reigniting concerns that this could spiral into an actual trade war and potentially triggering another round of risk aversion.

Meanwhile, the political and geopolitical landscape is looking increasingly better. The summit between US and North Korea is back on the agenda for next week, and although it may only produce symbolical results, that still bodes well for market sentiment in the sense that the risk of military confrontation is decreasing. In politics, Italy grabbed the spotlight for a few days, but that storm seems to have passed for now. Markets calmed down after the nation finally formed a government, avoiding the scenario of early elections, something that was being framed as an implicit referendum on the euro, with investor anxiety around that prospect sending shock waves across risk assets globally.

Technically, gold is at a very critical juncture. Prices continue to trade between $1282 and $1307, and a decisive break above or below this range could determine the next directional wave. Every advance in recent weeks has been halted by the upper bound of that range at $1307, where the 200-day moving average is also located. If buyers manage to power through $1307 and close above it, that would turn the technical outlook back to neutral (from cautiously negative now) and could set the stage for further upside extensions, initially towards the May 11 peak at $1326. Even higher, the $1341 zone may offer some resistance before the $1355 hurdle comes in sight, defined by the highs of March 7 and April 19.

On the downside, a decisive close below the metal’s low for 2018 at $1282 would turn the outlook to decisively negative, opening the way for declines towards the $1265 territory, marked by the low of November 3. Lower still, the December 2017 trough of $1236 would increasingly come into view.

Moving forward, the next risk events for gold prices are likely to be the Trump-Kim Jong Un meeting on June 12, and the US announcement on which Chinese goods it will impose tariffs on, scheduled for June 15. The Fed rate decision on June 13 could also generate volatility, to the extent that it triggers a sharp move in the US dollar. While a lot of uncertainties linger, a plausible scenario for prices is one where they correct a little lower on some optimistic headlines surrounding North Korea early next week, before spiking higher a few days later should the US follow through with slapping tariffs on China. The question is, will any of these events be enough for gold to break out of its recent lull, and move below $1282, or above $1307?