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James Hyerczyk
Comex Gold

Gold futures are trading flat-to-higher on Tuesday, basically mirroring the price action in the Treasury futures market, the U.S. Dollar Index and the Euro. These three markets are likely to have the biggest influence on prices this week

At 07:10 GMT, December Comex gold futures are trading $1937.40, up $2.80 or +0.14%.

Earlier in the session, gold prices eased, weighed down by a stronger U.S. Dollar, but losses were limited by growing fears over the global economic recovery from the coronavirus crisis. A further elevation of cases could prompt governments and central banks to inject more fiscal and monetary stimulus into their respective economies, underpinning gold prices.

Hopes around a swift economic recovery faded after data showed that Japan’s economy shrank more than initially estimated in the second quarter as capital expenditure took a hit from the pandemic.

Gold Traders Cautious Ahead of Treasury Auctions

Following Friday’s spike higher in U.S. Treasury yields, gold traders may be expressing a little caution ahead of this week’s Treasury auctions. Gold and Treasury yields are very closely linked. Since gold is a non-yielding asset, it tends to weaken when U.S. Treasury yields rise.

However, in this current environment, the relationship between interest rates and gold is a little skewed with the Fed making moves to hold interest rates near historical levels for years, and Treasury investors seeking better yields in the open market.

Last week’s action in the Treasuries was a good example of how confusing the direction of rates could be for gold traders over the short-run.

On Thursday, U.S. Treasury yields fell after a big decline in U.S. stock indexes made safe-haven Treasuries more appealing to investors. Gold hardly moved.

On Friday, U.S. Treasury yields spiked higher, propelled by August employment data and worries about an upcoming massive Treasury auction that could further support higher yields.

The U.S. Treasury will sell $50 billion of three-year notes on Tuesday, $35 billion of 10-year notes on Wednesday and $23 billion of 30-year bonds on Thursday.

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European Central Bank Meeting Another Concern for Gold Traders

On Thursday, the ECB will meet to discuss policy. Although no one expects any major moves, policymakers are expected to make comments about inflation after a report last week showed that Euro Zone inflation slipped into negative territory.

This is important to gold traders because the news will affect the Euro and the Euro is essentially the U.S. Dollar Index because of its 57% weighting in the basket.

Gold traders like to follow the dollar index so any major move in the Euro in reaction to an ECB comment could move prices. Not only are ECB policymakers concerned about Euro Zone inflation, but some also expressed some concerns about the value of the Euro. In fact, these comments encouraged long investors to book profits in the Euro last week.

Short-Term Outlook

Gold prices could consolidate for a few days this week until investors get some direction from Treasury yields and the U.S. Dollar. The direction of yields is likely to be dictated somewhat by U.S. inflation data and the results of the auction. Meanwhile, on Thursday, ECB comments on inflation or the value of the Euro should move the dollar index. Its direction should be a factor in determining the movement in gold prices later in the week.

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