Price of Gold Fundamental Daily Forecast – Powell’s Tone Will Determine Next Major Move in Gold

Gold prices are trading higher on Tuesday, following through to the upside after yesterday’s price surge netted nearly 1 percent. The market is rapidly approaching its five-month high at $1256.60, reached last week on December 10. Today’s price action is being driven by a weaker U.S. Dollar and another drop in U.S. Treasury yields.

At 1107 GMT, February Comex gold is trading $1253.90, up $2.10 or +017%.

The catalysts supporting gold, the dollar and Treasury yields, are being driven by uncertainties ahead of the start of the two-day U.S. Federal Reserve meeting. It’s not uncertainty over an interest rate hike. Traders have priced in a 25 basis point rate hike for several weeks. The major concern is whether signs of economic turbulence will prompt Fed policymakers to reduce the pace of future rate hikes.

The dollar remains the key driver for gold prices. If the Fed hits the brakes on its monetary tightening cycle in the face of rising risks to global growth then the dollar is likely to weaken. This is because gold is a dollar-denominated asset. When the dollar weakens, foreigners tend to increase demand for gold.

There is one problem that could arise for gold traders. It has to do with the post-meeting remarks from Fed Chair Jerome Powell. He is expected to tone down his assessment of the economy and inflation. However, by doing so, he runs the risk of coming across as too dovish.

The markets don’t mind if he’s dovish. In fact, traders expect him to soften his tone about the economy. If he says just enough to suggest the Fed will slow down the pace of future rate hikes then this could jump start a rally in U.S. equity markets. Furthermore, this could put pressure on yields, therefore, making the U.S. Dollar a less-desirable asset. And when the dollar weakens, gold tends to strengthen.

Additionally, a rapid turnaround in stocks could encourage those investors who bought the dollar as a hedge against the weakness to exit those positions. This would further support higher gold prices.

On the other hand, if Powell is too dovish and stocks sell-off hard then hedgers could increase their positions in the dollar. In this case, gold prices are likely to tumble like they did last week.

Essentially, it all comes down to how Powell expresses the Fed’s desire to limit the number of rate hikes in 2019.