Price of Gold Fundamental Weekly Forecast – Market Could Weaken if Fed Minutes are Hawkish

Gold futures hit a three-week high last week as investors responded to a weaker U.S. Dollar and expectations for higher inflation while showing almost no reaction to a recovery in U.S. stock markets and a sharp rise in U.S. Treasury yields to a four-year high.

April Comex gold futures finished the week at $1356.20, up $40.50 or +3.08%.

This was also the market’s biggest weekly gain in nearly two years.

The U.S. Dollar had the most positive impact on gold prices last week. The Greenback closed near a three-year low against a basket of major currencies last week while posting its biggest weekly loss in nine months. Several factors drove the move including negative sentiment which offset any support the Greenback received from higher Treasury yields.

Some investors blamed the worst weekly drop in the currency since February 2016 on the breakdown in correlation between the U.S. Dollar and Treasury yields.  The dollar’s weakness came as U.S. Treasury yields hit four-year highs and as stronger-than-expected U.S. inflation bolstered bets that the Federal Reserve could increase interest rates as much as four times this year.

The counter-intuitive price action left investors and analysts bewildered, as higher Treasury yields are normally associated with a stronger dollar.

Other investors said Treasury yields are being driven higher not by expectations for stronger growth, but by fears about fiscal instability and inflation spiraling out of control. This may be the reason an inverse correlation has emerged between the dollar and long-term Treasury yields.

In other news, U.S. consumer prices rose considerably more than expected in January, fueling fears that inflation is about to turn dangerously higher.

The Consumer Price Index rose 0.5 percent last month against projections of a 0.3 percent increase, the Labor Department reported last Wednesday. Excluding volatile food and energy prices, the index was up 0.3 percent against estimates of 0.2 percent.

The report indicated that price pressures were “broad-based,” with rises in gasoline, shelter, clothing, medical care and food.

Forecast

Gold will continue to be influenced this week by the direction of the U.S. Dollar, U.S. Treasury yields, higher-yielding assets and concerns over inflation.

Last week, gold was closely linked to the dollar. The dollar went down, and gold went up. We’ll be watching this week to see if this relationship continues. At some point, rising Treasury yields could begin to have a negative impact on gold prices.

Market conditions at this time can best be described as counter-intuitive.

The major market-moving event this week is likely to be the Federal Open Market Committee Minutes on Wednesday. They are expected to provide insight into how many interest rate hikes to expect from the Fed in 2018. A hawkish Fed could have a negative influence on gold prices.