Gold prices could stay range-bound, as investors react to the competing themes of bearish fundamentals versus a more bullish macro-economic environment.
In a new report Monday, Barclays Capital commodities analyst Suki Cooper writes that the gold market is increasingly taking its cue from Fed statements and is closely watching for signs that the Fed may have to continue an aggressive monetary policy.
Friday’s weak March employment report was the latest piece of data supporting that view, as it raised concerns about the strength of the labor market. “The door to further quantitative easingremains ajar,” writes Cooper.
It is expected that another round of quantitative easingfrom the Fed would keep interest rates lower, longer and is seen as bullish for non-interest bearing assets such as gold.
Other bullish macro-economic factors she cites include increased concerns about inflation at the European Central Bank (ECB) and a surprise increase in China’s official manufacturing index in March.
This is in contrast to the technical and more fundamental underpinnings of the gold market, which range from neutral to bearish.
“Two factors that we need to watch are physical demand and ETF demand,” says Cooper. The “end of the strike (in India) should provide support for prices” she says. A three week old strike by jewelers in India ended Friday as government officials said they would “consider” revoking an increased levy on gold imports.
Weakness in physical demand from India and also, China is one of the fundamental reasons Cooper had cited in making the “bear” case for gold. Reports say that the strike in India could resume on May 11, if the tax is not revoked. “One that we need to keep an eye on,” says Cooper.
As for ETF demand, the most recent data for fund flows is flashing “neutral” with a warning to the downside.
“Flows for April have been lackluster with a modest net outflow of less than a tonne. Should the longer-term sticky investor interest turn vastly negative, gold prices would be susceptible to deeper corrections.”
With price resistance at $1690 per troy ounce and investor support at the $1600 level, including demand from China, Cooper says that she will not get back in until there is a clear sign that the bull trend has resumed.
“Unless one of those catalyst changes, we should remain stable,” says Cooper.Follow me on twitter @LoriSpechler and read more of my posts on http://marketinsider.cnbc.com