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James Hyerczyk
Comex Gold

Gold is trading better on Monday, reversing some of Friday’s weakness as some speculative buyers were attracted to relatively cheaper prices while others booked profits ahead of Wednesday’s U.S. Federal Reserve interest rate and monetary policy decisions.

Prices fell sharply last Friday as a jump in U.S. employment data boosted hopes of a swift economic recovery. The market also hit a one-month low at the end of the week as strengthening demand for higher risk assets drove down gold’s appeal as a safe-haven asset.

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At 10:39 GMT, August Comex gold is trading $1697.30, up $14.30 or +0.85%.

Gold is rebounding on Monday, but the market still faces a number of headwinds that could continue to limit gains over the short-run. The longer-term picture is another story. Gold traders are now awaiting the outcome of the U.S. Federal Reserve’s two-day policy meeting ending on Wednesday at 18:00 GMT.

Traders don’t expect the Fed to touch interest rates. Lower rates are here to stay for a long as perhaps two years according to some reports. Although traders have stopped pricing in the possibility of negative rates after the surprise recovery in employment.

Short-Term Outlook Providing Headwinds

Now that the jump in the U.S. labor market is out of the bag, gold traders will now be looking at other countries to see if this trend will be replicated. If so, then this could be the source of further downside pressure for the precious metal.

Gold is seeing some physical/retail bargain hunting on Monday, mostly due to pent up demand at lower levels. This may be the long-term investors who see the lower prices as an opportunity. They are treating gold as an investment so lower prices are attractive to them.

Helping to drive prices lower are probably the over-leveraged gold speculators who can’t afford to hold their positions and are being forced out for liquidity reasons. Sellers are also hedgers who bought gold as protection during the stock market crash in March.

Holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, dipped 0.4% on Friday. Speculators also cut their bullish positions in COMEX gold in the week to June 2.

Both moves are signs of short-term liquidation, while the buying of physical gold likely represents longer-term investment.

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We expect to see the same type of trading pattern going forward, longer-term investors will come in when prices are cheap, while short-term traders will chase the news.

The Fed could have a lot to say about the next major move in the gold market. At this time, gold traders have almost no choice but to react to the huge rally in stocks, which is predicting a V-Shaped recovery. However, the Fed may not see a V-Shape recovery.

Wednesday could be a reality check for stock market investors betting on a V-Shaped recovery. Stocks could retreat and demand could shift back into gold if the Fed paints a gloomy picture of the economy.

The Fed has a hard job because it has to give an honest assessment of the economy and accurate future projections without creating stock market volatility. However, all it really needs to do is create uncertainty and that would be enough to encourage investors to trim stock market positions while perhaps dipping their toes back into gold.

For a look at all of today’s economic events, check out our economic calendar.
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