(Kitco News) – The gold market has found some new life as investors react to growing inflation pressures; however, one market analyst said that gold still needs to break through a critical level for momentum to pick up further.
In a telephone with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that last week gold made some impressive gains. The market has seen some follow-through buying Monday; December gold futures last traded at $1,824 an ounce, up 0.40% on the day.
However, Hansen said that the market still needs to push above $1,835 before the market sees new capital inflows. He added that $1,835 represents a significant resistance point in the current downtrend from the August 2020 highs. Gold has tested this level three times this summer.
“With this rally, you should give gold its due. This move deserves some respect, but let’s see if it will continue this week. I still don’t see the big push that is going to come from real money asset managers,” he said.
Hansen added that there needs to be more volatility in equity markets for gold to see a sustainable bounce higher. He explained that nobody is interested in holding a safe-haven asset when equity markets are pushing to record highs on a daily basis.
While the gold market still has to prove itself with a new breakout, Hansen said there are reasons to be optimistic. He noted that the equity rally is consolidated in just a handful of stocks.
“Right now, the stock market is the tail that is completely wagging the dog. The risk is with the rally so concentrated in a few stocks; momentum could turn on a dime,” he said. “The way the stock market is behaving right now, I wouldn’t be surprised if we saw another December like 2018. It was the worst December since 1930.”
Three years ago, the S&P 500 dropped 14% in December, falling to a two-year low.
Looking at other potential headwinds, Hansen said that investors also need to keep an eye on the U.S. dollar as it tests critical resistance. Although the U.S. dollar remains persistently strong, Hansen also noted that rising inflation pressures could end up creating a disconnect between the U.S. dollar and gold prices.
Inflation fears were ignited once again Friday when the U.S. Labor Department said that wages saw a 4.9% annual increase in October. According to some economists, companies are boosting wages to attract more workers who are leaving the workforce.
Wage pressures are increasing as the Federal Reserve reiterated its stance that higher inflation remains temporary.
Last week the U.S. central bank, as expected, announced that it was reducing its monthly bond purchases. However, Federal Reserve Chair Jerome Powell, said that now is not the time to raise interest rates.
In the current environment, Hansen said that breakeven rates are pushing higher, which is good for gold.
“Right now, the Fed doesn’t have a clue about inflation, so they will continue to stick with their transitory message,” he said. “If inflation does start to pick up and central banks are behind the curve, then you will want to have a few gold coins in your pockets.”