Price of Gold Fundamental Daily Forecast – Be Careful Chasing Short-Covering Rally or Betting on Recession

Gold prices picked up where they left off last week, flashing signs of an emerging bull market early in the session in reaction to another plunge in Treasury yields, a weaker U.S. Dollar Index and generally lower demand for risky assets. This isn’t a “safe-haven” or “flight-to-safety” move, but rather an investment driven rally as buyers see value at current price levels and expect to be rewarded for speculating on a Fed rate cut later in the year.

At 08:50 GMT, August Comex gold futures are trading $1319.90, up $8.90 or +0.88%.

The Back Story

Although the media outlets want you to believe the rally is a bet on a recession, I think that’s premature speculation. Let’s see more evidence of an economic slowdown and a rate cut by the Fed before we start pricing in a recession. I know it’s all about the inverted yield curve and its ability to forecast recessions, but quit trading the headlines or you’re going to get burned. Read the research, the inverted yield curve indicator may not be as accurate as you think according to the latest studies.

Don’t worry about a recession now, just follow the money. Over the past week or so, we’ve seen increasing investor interest in gold with holdings of SPDR Gold Trust, the world largest gold-backed exchange traded fund, rising 0.32 percent to 743.21 tonnes on Friday from Thursday.

Furthermore, according to weekly Commodity Futures Trading Commission (CFTC) data, hedge funds and money managers increased their net long positions in COMEX gold in the week to May 28, data showed.

Hedge funds are short-term traders. They place money when they see value and opportunity. The money that is leaving the long side of crude oil is probably moving into the long side of gold because the hedge funds see a relatively cheap asset with tremendous upside potential.

Recession and Long-Term Thinking

Betting on a recession and thinking about a long-term investment in gold could encourage you to overbuy the metal and forego relatively cheap prices chasing it higher on the thought that you are missing the “big move”. I don’t think it’s a good time to think long-term because the market is still in the “stop and start” stage, meaning think about buying the dips rather than strength.

Investors seem to be attached to stories that say recessions followed past yield curve inversions. It’s a tricky signal to follow and therefore may not be the reason gold rallied last week. Furthermore, it hasn’t been a very useful signal for investors because of timing issues.

Recessions have followed the inverted yields, but the lag has ranged from six months to almost three years. In other words, don’t buy gold because you think a recession is coming, play the long side if you think there is value and believe the Fed will cut rates.

The inverted yield curve is one of several indicators used by the professionals to suggest slower growth, lower returns and more volatility ahead, it doesn’t necessarily mean a recession is coming. Furthermore, if the Fed lowers rates as expected in a timely manner, this move may actually extend the long-running expansion and bull market.

Additionally, I don’t think the U.S.-China trade dispute is going to last 18 months to 3 years either. Have you priced in the possibility both economic powerhouses restart trade talks next week or the week after? What if Trump calls of the tariffs on Mexico? These are real issues so I think it’s best to view gold as a short-term investment right now.