Price of Gold Fundamental Daily Forecast – Dovish Fed Supportive, Gains Limited by Demand for Risk

Gold futures whip-sawed after the Fed decisions on Wednesday. The dovish tone sent the U.S. Dollar lower, creating demand for gold, but the market ran into a wall of selling at a technical chart point, pushing it lower for the day.

December Comex gold settled at $1255.60, down $2.90 or -0.23%.

The U.S. Federal Reserve left its benchmark interest rate unchanged as widely expected. However, the central bank laid the groundwork for winding down its massive stimulus program in September. The move is essentially yield-curve management. The Fed is saying that the economy is too weak to handle a full rate hike, but the central bank can continue to tighten gradually by trimming its $4.5 trillion balance sheet.

The Federal Reserve said they plan to start unwinding “relatively soon,” which investors interpreted to mean September, since previously the central bank hinted it would start in December.

Finally, the central bank also acknowledged that inflation remains below its 2 percent target.

U.S. Treasury yields fell after the Fed announcements. This indicates investors felt the central bank was dovish. The benchmark 10-year yield traded at 2.3 percent while the two-year yield held around 1.363 percent. The drop in Treasury yields made the U.S. Dollar a less attractive investment, helping to boost the dollar-denominated gold market.

Forecast

December Comex gold futures are currently testing a key retracement level at $1269.40. A sustained move over this level will set a bullish tone. This could trigger accelerations into $1285.00 then the main top at $1305.50.

A failure to overcome $1269.40 will signal the presence of sellers. This could drive the market back into the 50% level at $1258.30. Crossing to the weak side of this level will put gold in a bearish position.

Rate increases are usually not good for gold, but the speed at which the Fed is tightening may give gold a little room to rally. However, increased demand for higher risk assets could put a lid on prices.

Gold will continue to get support from falling Treasury yields and weakness in the U.S. Dollar. Political and geopolitical risks could also underpin the market. These factors may be enough to generate a slow, steady rally. However, I don’t expect to see a spike to the upside unless stocks sell off sharply.