Metal Outlook: Gold Market To Keep Focusing On Fed Expectations, Also Eye Egypt, ETF Flows

By Allen Sykora,

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Friday July 5, 2013 2:30 PM

(Kitco News) -Gold traders are likely to remain preoccupied next week with thoughts about when the Federal Reserve might scale back its quantitative-easing program, although the ongoing conflict in Egypt and exchange-traded-fund flows also will be on their collective radar.

Gold has suffered since mid-June when Fed Chairman Ben Bernanke suggested policymakers could start to taper their bond-buying program yet this year if the economy continues to improve. Analysts say that notion was reinforced Friday when the U.S. jobs report for June was stronger than what markets had factored in. Gold fell as the dollar and Treasury yields rose.

Gold and silver were higher for the week until the Labor Department early Friday reported a stronger-than-forecast 195,000 rise in June non-farm payrolls, along with upward revisions for May and April. The market then turned south, with the most-active August futures finishing the week with a loss of $11 to $1,212.70 an ounce on the Comex division of the New York Mercantile Exchange. September silver lost 73.4 cents for the week to $18.736.

Traders will keep monitoring data to see if in fact the economy does continue to pick up or instead reverses course, although the economic calendar is light until weekly jobless claims Thursday, followed by the Producer Price Index and University of Michigan/Thomson Reuters report on consumer sentiment Friday. On Wednesday, they will also get minutes of the last meeting of the Federal Open Market Committee.

"We had the jobs report today. That moved forward expectations that the Fed eases (up on its bond purchases) sooner rather than later," said Robin Bhar, analyst with Societe Generale. "So the market will be focused on economic data to fine-tune when they will start."

In particular, this could exert some pressure on gold during the early part of the week, said Sean Lusk, director of commercial hedging with Walsh Trading. That's because a lot of U.S. traders are away on Friday, taking a four-day weekend after the Fourth of July holiday on Thursday. When they return Monday, some will be reacting to the jobs news for the first time.

Had trading desks been fully staffed on Friday, gold may have fallen by as much as $60 to $70 after the jobs report, said Sterling Smith, futures specialist with Citi Institutional Client Group. As a result, he likewise suspects gold could weaken further on Monday, at least while returning market participants play catch-up.

Traders Also To Monitor Egypt, ETF Flows

While the dollar and Fed seems to be constantly on the minds of gold traders, the gold market also may start reacting more to the political crisis in Egypt, said Afshin Nabavi, head of trading with MKS (Switzerland) SA. Tensions are high in Egypt, with protests occurring after the military took over control of the government this week following discontent with the president. Egypt is not a major oil producer, but the market nevertheless tends to worry about whether crises in the region will spread and disrupt shipments, such as through the Suez Canal.

"The situation in the Middle East, particularly Egypt, is pretty tense," Nabavi said. "That's reflected in the price of oil right now. Gold could follow the gold market."

August crude oil on the New York Mercantile Exchange traded as high as $103.25 a barrel this week, its highest level in more than a year.

Traders also continue to monitor holdings of exchange-traded products backed by gold, Bhar said. Large outflows have occurred so far this year as investors exited positions, adding to the downdraft in gold.

Additionally, observers said, the market will remain on the lookout for any signs on whether physical demand picks up more strongly. "Physical demand is slowly starting to pick up and we look for gold to hold in here with $1,250 now our short-term resistance," said a research note from TD Securities.

Barclays pointed out that ETP outflows have slowed during the early part of July, with 4.8 metric tons for the month so far.

"However, physical demand has not responded to the lower price environment to the same magnitude as seen in April," Barclays said. "Volume traded on the Shanghai Gold Exchange remains elevated but well below the levels set in April; the rolling monthly average is some 20% below the peak set in April. Demand in India remains lackluster, with local traders reporting subdued interest in the usually slow period for demand."

(Editor's note: Neils Christensen contributed to this story.)

Read the latest news in gold and precious metals markets at Kitco News.

By Allen Sykora of Kitco News;

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Commodities
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