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James Hyerczyk
Comex Gold

Gold futures are edging lower on Friday despite a dip in U.S. Treasury yields. The market rallied on Thursday even though yields rose sharply. This suggests traders are out of sync with the interest rates, at least temporarily.

This is understandable because the steep sell-off this week probably has many of the smaller players still licking their wounds. There were likely some heavy losses this week from traders who bought near the highs so it may take a few days to move some money around before they get back on the horse.

At 08:45 GMT, Comex gold futures are trading $1955.10, down $15.30 or -0.78%.

The price action also suggests that gold traders are a little more locked in on the U.S. Dollar this week. After a promising start, the greenback has drifted mostly sideways to lower, and is in a position to post a slightly lower close for the week.

Meanwhile, gold has mirrored the move in the dollar. With the dollar’s early spike to the upside, gold plunged, but when the greenback started to flatten out, gold traded higher to flat.

The price action also suggests that short-term gold traders may be a little confused about how to play the stalemate in Washington. Many were betting on another round of fiscal stimulus by now from Washington, but with Congress taking a break until the U.S. Labor Day holiday, it looks as if there may not be a federal government aid package until at least the first week in September.

Meanwhile, the longer-term bullish outlook remains intact. Massive money-printing by central banks, an ultra-low interest rate environment and worries over the economic fallout from mounting coronavirus cases have helped gold rise more than 27% so far in 2020.

Additionally, the Fed’s recent gloomy assessment for the economy is very supportive for gold. Recently, policymakers warned U.S. growth would be muted until the coronavirus was contained.

Short-Term Outlook

We said earlier in the week that gold is fragile over the short-run and especially this week because of the massive U.S. Treasury auction. With new supply coming in, interest rates tend to rise as notes and bonds fall.

Thursday’s Treasury bond sale was met with weak demand, Reuters reported, which also pushed yields higher. Despite this development, gold showed little reaction to the news with traders zeroing in on the movement in the U.S. Dollar.

The 10-year Treasury note hit its highest level since June 24, while the 30-year reached its highest level since July 7. Also helping to boost rates was a U.S. jobs report which showed that the number of people claiming unemployment benefits was 963,000 last week. It’s the first time the figure has fallen below 1 million since March, when the coronavirus pandemic took hold in the U.S.

Over the short-run, gold is vulnerable to the downside if Treasury yields continue to trend higher. Improving labor market conditions could be the catalyst behind such a move. Additionally, rising rates could also boost the U.S. Dollar, which would be another bearish catalyst for gold.

Gold could also become rangebound over the near-term if rates stabilize, or move higher and the U.S. Dollar remains weak.

We’ve entered a difficult period where the short-term direction of Treasury yields and the dollar is unclear, and this may be reflected in a sideways gold trade.

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

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