Gold Consolidation May Persist But Risks Are to the Upside

Gold prices haven't mirrored the breakouts seen across other benchmark financial assets, with traders seemingly unsure which of the yellow metal’s properties – its allure as a store of value, that would attach it to safe-haven assets, or its perceived attraction as an inflation hedge, that would link it to risk appetite – are going to dominate price action in the near term.

The risk aversion has staged a comeback, with stocks reversingsharply lower having tested May’s swing top to post the worst weekly performance in over three months. This seems reasonable considering most of the engines of the global economic recovery are meaningfully faltering. Indeed, European growth is likely to remain lackluster as the region tries to trim its sovereign debt burden, Japan remains in deflation, China is willfully pulling on the brakes amid fears of overheating, and the US has notably lost pace.With that being said, risky assets seem to be scope for a corrective rebound in the near term given the pace of last week’s selloff as well as expectations of some encouraging results on second-tier US economic indicators. Producer Prices are set to rise for the first time in four months, Industrial Production is expected to pick up momentum, and Housing Starts are set to snap a two-month losing streak in July. Traders have long looked to the health of the world’s largest consumer market as a proxy for the global recovery at large, and while these results are unlikely to prove sufficient to stop risk aversion in its tracks, they could certainly engineer an upward retracement across global stock exchanges.

What all of this means for the gold prices remains unclear. On balance, as we outlined in our long-term gold forecast, ETF holdings have been the largest driver of the yellow metal’s spot price. Holdings snapped a three-week losing streak in the five sessions ending last Friday, suggesting that perhaps gold’s lack of follow-though on the recent pick-up in volatility elsewhere is proving attractive in and of itself and hinting that the path of least resistance favors the upside (at least for now).