Treasury yields and the amount of bargain hunting that emerges after this week’s sell-off will be closely watched by gold traders next week.

Prices fell sharply this week after remarks from Federal Reserve Chairman Ben Bernanke Wednesday suggesting that the Federal Reserve may be able to start tapering its asset purchases, known as quantitative easing, sometime this year and potentially could end them by the middle of next year, assuming the U.S. economy continues to improve, analysts said. The Fed chairman emphasized more than once that any actual steps would hinge on future economic data, but markets nevertheless zeroed in on the potential for tapering, with equities weakening but Treasury yields and the U.S. dollar rising.

August gold settled after the pit session Friday at $1,292 an ounce on the Comex division of the New York Mercantile Exchange, a loss of $95.60 for the week. July silver lost $1.995 for the week to $19.959.

The weekly Kitco News gold survey had smaller-than-normal participation, with 19 respondents taking part. Of those, 11 see prices down next week, while four see prices up and four look for sideways consolidation. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.
Much of the action in gold over the next several days may hinge on the continuing response of other markets to this week’s Fed news.

“The dollar and Treasurys are the focus right now,” said Frank Lesh, broker and futures analyst with FuturePath Trading. “We’ll be watching the 10-year yield closely — all the yields for that matter, but the 10-year is the benchmark and drives it all.”

Gold tends to fare best in a low interest-rate environment, and vice-versa. The 10-year yield so far Friday has been as high as 2.495%, its highest level since August 2011. “All markets will be watching this situation with the 10-year,” Lesh added.

The analyst said he anticipates a sideways market next week, since price consolidation often sets in after big moves. “I would expect some pressure to subside, unless of course these 10-year yields rise really dramatically,” Lesh added.

Gold traders also will be watching to see if there is a surge in physical demand around the world by bargain hunters, similar to the one that occurred in April after a two-day sell-off in gold of more than $200. Already, there are reports that activity has picked up in the key Far East buying region.

Several analysts, however, warned that potential buyers may be more cautious this time, wanting to watch to see if gold stabilizes first.

“So far, we have not seen the type of hysteria for physical bars we saw on gold’s last sell off, but it usually takes a few days to entice the buyers,” said a research note from TD Securities Friday morning.

Sean Lusk, director of commercial hedging with Walsh Trading, said he fears that the pressure is not over yet for gold, but he looks for some evening of positions and bargain hunting during the early part of the week to offer at least some support. Otherwise, he said, much of the focus is likely to be U.S. economic data.

In particular, traders will be watching to see whether the data flow justifies the Fed’s seemingly more upbeat view on the economy. Major reports next week include durable goods, consumer confidence and new home sales on Tuesday, gross domestic product on Wednesday, then weekly jobless claims and personal income and spending Thursday. Next Friday will bring the Chicago Purchasing Managers Index and University of Michigan/Thomson Reuters consumer-sentiment index.

However, RJO Futures commodities broker Daniel Pavilonis questioned whether even soft U.S. data would offer much support for gold in the near term. “Technically, it remains weak,” he said.

But whereas bearish sentiment has increased lately, there are still bulls around in the futures market, only many are staying on the sidelines for now, Pavilonis added.

“They want to get long, but they are going to wait for more of a pullback,” he continued. “That’s probably the biggest category of people who want to get into the market.”

Article Courtesy of www.kitco.com and Allen Sykora

Intonu is a leading trader in ferrous and nonferrous metals in Atlanta and the Southeast region.