Gold Fundamental Analysis – Forecast for the Week of September 26, 2016

Gold futures rallied last week as investors had a knee-jerk reaction to the Fed’s decision to leave interest rates unchanged last week. December Comex Gold futures finished the week at $1341.70, up $31.50 or +2.40%.

The catalyst behind last week’s rally was primarily a drop in the U.S. Dollar. The U.S. Federal Reserve’s decision to leave rates at current levels was one reason for the weakness in the Greenback, but concerns about future rate hikes and the strength of the economy also made the dollar a less-desirable investment.

At the end of the week, traders pegged the chances of a December rate hike at about 50/50. This is pretty close to where it was a month ago. Dollar investors were also disappointed by the Fed’s decision to lower its forecast for economic growth and to reduce the number of interest rate hikes it expects to make over the next few years.

A weaker dollar tends to make gold a more attractive to foreign investors, providing support and increasing demand enough to drive prices higher. On the flip-side, stocks rallied in response to the persistently low interest rates, however, rising stock prices tend to put a cap on gold prices. This is because investors buy stocks for appreciation and yield. Gold doesn’t pay a dividend or interest. Therefore stocks are more favorable investments during periods of low interest rates.

FORECAST

It’s going to be a fairly active week for U.S. economic data. The major reports include the Conference Board’s Consumer Confidence report on Tuesday. Wednesday will feature the Core Durable Goods report and testimony from Fed Chair Janet Yellen. Final GDP is due out on Thursday. Yellen rounds out the week with a speech on Thursday.

Since gold has been tracking the dollar, the most important events this week may be the speeches from Yellen and other Fed members since they tend to have a more immediate effect on the movement of the U.S. Dollar.

FOMC Member Daniel Tarullo is scheduled to speak on Monday. FOMC Member Stanley Fischer will speak on Tuesday. FOMC Members James Bullard and George will speak on Wednesday and FOMC Member Powell will speak on Thursday.

Earlier in the month, Tarullo said he wants to see more evidence of sustained inflation before considering an interest rate increase. But he added he can’t rule out a hike this year.

Although Fischer is considered to be a close ally of Yellen and tends to be in agreement with her, he has recently sounded a little more hawkish, signaling in late August that a 2016 rate hike is still under consideration, saying the U.S. economy is already close to meeting the central bank’s goals and that growth will gain steam.

Also in August, St. Louis Federal Reserve Bank President James Bullard, said that the September Fed meeting might be a good time to raise interest rates. He said, “If we go to a meeting and we felt things were looking stronger, that might be a good time to do that.”

Kansas City Fed President Esther George dissented in the last interest rate decision. She voted no on holding rates steady, preferring to raise them by a quarter-percentage point immediately. FOMC member Jerome Powell voted with the majority at the last meeting.

Investors will be listening to the Fed members as to the timing of the next Fed rate hike. Hawkish commentary tends to pressure gold prices while dovish comments tend to be supportive.

Next Monday night, the first of several presidential election candidate debates will take place. This event could cause volatility in the financial markets.