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James Hyerczyk

Spot Gold finished lower on Thursday, after nearly hitting a nine-year high the previous session. All that really means is that if you bought gold nine-years ago, you’re investment is almost at break-even. Talk about putting your money to work. Let me know when we’re at new all-time highs.

Traders said that gold retreated because investors moved money into the safe-haven greenback in the face of record U.S. coronavirus cases. Wait a minute…didn’t gold go up on Wednesday for the same reason?

On Thursday, August Comex gold settled at $1803.80, down $16.80 or -0.92%.

Not Worried About Long-Term Risk

We’re not worried about the long-term risks of holding gold, because central banks worldwide have slashed interest rates in recent months, providing in some cases unprecedented amounts of stimulus to help soften the blow to the economy from the pandemic. Furthermore, several said their benchmark interest rates would hover near zero-percent for 2 or 3 more years. That should help keep a solid long-term foundation intact.

There are short-term risks, however. Firstly, the U.S. economic reports have been good and supportive for a V-shaped recovery. Furthermore, so far the rise in coronavirus cases hasn’t fueled any major disruptions in the economy.

On Thursday, the government said U.S. initial jobless claims hit 1.314 million last week, compared to a Dow Jones estimate of 1.39 million. Continuing claims, or those who have been collecting for at least two weeks, dropped 698,000 from a week ago to 18.06 million.

It’s not good news when a so-called “reopening economy” is still losing 1.314 million jobs a week, and certainly 18 million people receiving unemployment benefits is not a highly desired outcome. These may be numbers that raise concerns at the Fed, but I don’t think they’re scary enough to prompt the Fed to initiate another wave of stimulus.

So this may be the reason for the choppiness in gold over the short-term. Buyers are anticipating new stimulus from the Fed. And this is understandable because on Wednesday, U.S. Federal Reserve officials raised fresh doubts about the durability of the U.S. recovery, while new business survey highlighted developing risks from the relentless coronavirus pandemic.

However, I don’t think we’re going to see a short-term boost in gold prices unless the Fed actually makes a move with the stimulus. In other words, we know the economy is going to struggle at times as it tries to mount a recovery, and we know the Fed is going to remain right there to provide stimulus when needed. These two factors have already been priced into the gold market since at least April 14 when gold made its first major top of the year.

In the August Comex gold futures contract at price is $1789.00. On July 8, this same futures contract hit a high of 1829.80. The gain from high to high has only been 2.23%.

If the Fed continues to “talk the talk” and doesn’t make an aggressive move to solidify the economic recovery then I don’t expect to see much change in gold prices. Sure there will be an upward bias, but gains, if any, are going to be a grind.

Furthermore, gold is an investment and not a safe-haven asset. If money continues to flow into stocks and higher-yielding currencies then non-interest or dividend-paying gold is going to struggle because it competes for investor capital with those higher-yielding assets. Meanwhile, if investors see any trouble on the horizon then they are going to park their money in Treasury Bonds and the U.S. Dollar. This should cap any rally in gold.

The bottom-line:  Don’t expect an upward spike in gold prices until investors are prompted to chase it higher because of some surprise action by the Fed.

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

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