Gold Fundamental Forecast – February 22, 2017

Gold prices plunged early in the session on Tuesday as investors reacted to the gap higher opening in the U.S. Dollar index and hawkish talk from a pair of Fed officials. The biggest supporting factor for the dollar was a steep drop in the Euro with talk of a March rate hike coming in a close second.

The market posted a strong comeback rally late in the day to erase most of its earlier loss.

April Comex Gold finished the session at $1238.90, up $0.40 or +0.03%.

On the resistance side, late Monday, Cleveland Fed President Loretta Mester said she would be comfortable raising interest rates at this point if the economy maintained its current performance. Later in the day, the Greenback received another push higher after Philadelphia Fed President Patrick Harker said a March rise was on the table.

U.S. economic data showed the U.S. Purchasing Managers Index (PMI) was at 53.9 in February, down from 55.6 in January and expectations for 55.8.

Gold was supported by growing political risk in Europe. Investors were reacting to anti-European Union rhetoric from French presidential candidate Marine Le Pen and Dutch candidate Geert Wilders ahead of the first round of French elections on April 23 and the Netherlands’ March 15 parliamentary election.

San Francisco Fed President John Williams sounded dovish when he warned Tuesday that the global drop in interest rates since the financial crisis is likely to persist and will make it harder for central banks to keep world economies healthy.

Singing a similar dovish tune was Minneapolis Fed President Neel Kashkari who said the U.S. labor market has “more room to run”, suggesting he does not believe the central bank should raise rates quickly to head off inflation.

Short-covering, profit-taking and position-squaring ahead of the release of the Fed minutes on Wednesday may have also been behind the late surge in gold prices.

Forecast

The strong comeback in gold on Tuesday is further proof of its resiliency. Gold has been performing well lately despite talk of rising U.S. interest rates, a stronger dollar and stocks at record highs. This represents an actual concern over the geopolitical events in France and the Netherlands.

In the U.S. on Wednesday, gold investors will get the opportunity to react to the latest data on Existing Home Sales. This report is expected to show a 5.55 million unit gain. FOMC Member Powell is also expected to give a speech.

The highlight of the day will be the release of the Fed minutes from its February Monetary Policy meeting. The minutes of the January 31 – February 1 meeting could signal if another interest rate hike is imminent.

We’re expecting to see volatility after the minutes because investors are going to take the information in the minutes and piece it together with last week’s testimony before Congress by Fed Chair Janet Yellen to draw a conclusion on the chances of a Fed rate hike in March. Currently, fed fund futures are giving just 17% odds of a rate increase in March and 47% in June.