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James Hyerczyk
Gold Bars and Dollar
Gold Bars and Dollar

Gold is trading lower early Tuesday, but well off its low, helped by a slight dip in Treasury yields and a weaker U.S. Dollar Index. Increased demand for risky assets may be helping to limit gains.

At 0843 GMT, December Comex Gold is trading $1232.60, down $1.80 or -0.15%. Earlier in the session, it hit a low of $1227.00.

Some traders tried to build a case for a bullish gold move because of escalating tensions between the United States and Iran, but that’s not how the markets work. Gold is no longer the go-to market during threats of war. Gold is an investment. So it will be judged against other safe haven investments like the Japanese Yen and U.S. Treasury Bonds.

We’ve said over and over that flight-to-safety moves start with investors moving money into Treasurys. This causes yields to drop. When yields drop, the U.S. Dollar becomes a less desirable investment. And when the dollar weakens, foreign demand for dollar-denominated gold tends to increase.

In other news, despite a rise in prices late last week, gold holdings at exchange-traded funds tracked by Reuters have fallen 5.3 percent, or 2.4 million ounces, since mid-May as investors choose other asset classes.

According to Julius Baer analyst Carsten Menke, “It (gold) still trades in ‘currency mode’ rather than ‘commodity mode’ as investment demand remains too soft to push prices higher.”


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Forecast

The direction of the gold market today is likely to be determined by the same three factors that have been driving the price action all year – Treasury yields, the Dollar and appetite for risk. Gold is likely to remain under pressure as long as all three factors are rising.

There is another development in the gold market that we are watching because it is often a very good contrarian indicator. Hedge funds and money managers switched to a net short position in COMEX gold contracts for the first time since 2016 in the week to July 17, U.S. Commodity Futures Trading Commission (CFTC) data showed last Friday.

We, along with analysts at Commerzbank, believe this could be an indicator of a pronounced counter-trend move in the near future. However, we don’t know the catalyst at this time that could drive out the short-sellers and bring in the new buyers. Additionally, we’ll let Treasury yields, the Dollar and appetite for risk tell us when to start buying gold.

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