Price of Gold Fundamental Weekly Forecast – Rising Demand for Higher Risk Assets Could Limit Gains

Gold prices posted a strong gain last week after U.S. economic data raised concerns over the Fed’s ability to raise interest rates for a third time this year. The market was also underpinned by dovish comments from several Fed policymakers, including Fed Chair Janet Yellen who talked about gradually increasing interest rates while signaling to traders her increased concerns about softening inflation.

August Comex Gold futures settled the week at $1227.50, up $17.80 or 1.47%.

Buyers came in at mid-week to underpin gold prices as Yellen gave her dovish testimony to the Senate Banking Committee. Even stronger buying came into the market following the release of weaker-than-expected economic data on Friday. Gold was also supported by political risk after President Donald Trump’s eldest son released an email chain citing Russian support for his father before last year’s U.S. election.

Speculators aggressively bought gold on Friday, after weaker-than-forecast government data on consumer inflation and retail sales in June raised doubts about U.S. economic growth and whether the Federal Reserve would raise interest rates again in 2017.

U.S. consumer prices, as measured by the Consumer Price Index (CPI), were unchanged in June. Economists had forecast the CPI inching up 0.1 percent last month.

Retail sales fell 0.2% in June to mark the second straight drop and match the biggest decline of the year. Economists had forecast a 0.1% increase in June sales. May’s data was revised to 0.1%. The revision showed the previously reported decline was not as large.

These events drove U.S. Treasury yields lower, helping to push the U.S. Dollar lower by making it a less-attractive investment. This drove up foreign demand for dollar-denominated gold.

Forecast

Last week’s price action suggests the presence of speculative buyers. Having been burned in the past, however, these buyers are going to be looking for bullish data to sustain the move. This could cause volatility. Additionally, it means that U.S. economic reports from now until the next Fed monetary policy statement on July26 are going to take on added importance.

Ultimately, the direction of gold prices will be influenced by the direction of U.S. Treasury yields. If yields continue to fall then look for gold to continue to be underpinned. However, the increased demand for higher-yielding assets could put a lid on the rally.

We know that gold tends to move up when the U.S. Dollar weakens, but it also faces selling pressure when stocks rise because it is a competing asset.

Gold prices could also be influenced by political events this week like the healthcare reform vote and the continuing Trump saga.

The major economic reports this week are building permits and weekly unemployment claims. These are followed by minor reports such as the Empire State Manufacturing Index and Housing Starts.

Look for gold prices to be underpinned this week because it looks as if sentiment has turned bullish. However, stronger demand for higher yielding assets is likely to put a lid on prices.