Volatile Week Ahead of Gold; Upside Potential Remains Strong


On Friday, gold prices fell but still registered a third straight weekly gain. Gold for December delivery shed $7.60, or 0.6%, to settle at $1,321.90 an ounce on the Comex division of the New York Mercantile Exchange. Gold for August delivery fell $7.30, or 0.6%, end at $1,321.50 an ounce.

Both contracts finished 2.2% higher on the week, marking a third consecutive week of advances. Over the course of the three weeks, prices registered a rise of 8.8%.

Data released on Friday in the U.S. showed that consumer sentiment hit a 6-year high, rising to 85.1 in July. That was well above expectations for a reading of 84 and above a preliminary reading of 83.9. However, the precious metals market reaction was brief.

A weaker dollar didn’t didn’t help gold prices either. While it was off one-month lows against the euro and the British pound, based on the ICE dollar index DXY, it was still down about 1% for the week. A softer dollar tends to encourage buying of gold and other dollar-denominated commodities by holders of other currencies and this may become the case for many investors in the coming week.

Demand for gold remains strong with a number of central banks from the emerging markets continuing to expand their gold reserves in June, according to latest data released by the International Monetary Fund. Chinese demand, in particular, remains robust. On the other hand, supply is dropping because gold mines are unprofitable at the current levels. The World Gold Council expects a decline in scrap supply this year.

In the coming week, market participants will be watching U.S. data and a policy statement after the FOMC for more signs on when tapering of quantitative easing might start, and the impact of this on Treasury yields. Gold traders will be keying off interest rates and the dollar.

A large number of news events holds a potential for the market to be volatile in the coming week. Unfolding political unrest in North Africa, namely in Egypt and Libya, would also influence the price of gold most likely on the way up. Geopolitical uncertainty does not bode well for investors sentiment and commodity prices. In Egypt, over 120 people died only on Saturday in fresh violent protest, while in Libya a thousand of prisoners escaped state facilities as protesters stormed offices of political parties.

In addition, seasonal factors will start to move to the forefront in gold. For example, the Indian wedding season falls into September and traders will factor a potential rise in prices. The yellow metal typically tends to draw support from late August into year-end due to physical buying tied to gift-giving holidays around the world, ranging from autumn festivals in India to Christmas in Western nations.

Another focus next week will be first-notice day for the August futures on Thursday. To avoid delivery, traders must make decisions on whether to exit positions or roll them ahead into deferred contract months.


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