Price of Gold Fundamental Daily Forecast – Rising Treasury Yields Will Cap Gold Prices

Gold prices finished marginally higher in limited trading as investors sat on the sidelines after Monday’s steep sell-off and yesterday’s volatile Forex trade. Mixed news probably led to the low volume and tight range.

August Comex gold finished the session at $1246.90, up $0.50 or +0.04%.

The U.S. Dollar Index plunged on Tuesday, however, this was only enough to underpin gold. There wasn’t enough buying to match the weakness in the dollar.

Optimistic comments from European Central Bank President Mario Draghi drove the EUR/USD to a 10-month high on Tuesday. He hinted the ECB could trim its stimulus this year.

The dollar was also pressured by a stronger British Pound. It rallied after the Bank of England tightened its controls on bank credit to more normal levels on Tuesday, deciding the risk had passed of a big hit to the economy and to lending after last year’s Brexit vote.

Despite how the U.S. Dollar Index chart looks, the Greenback was actually supported by an upbeat Conference Board Consumer Confidence report and hawkish comments from a Fed official.

When trying to trade gold against the price action of the dollar index, keep in mind that it is a weighted geometric mean of the dollar’s value relative to other select currencies. The Euro carries a 57.6% weight so its rally had a huge influence on the dollar index on Tuesday.

Philadelphia Fed President Patrick Harker helped provide support for the U.S. Dollar when he said he supports the decision to raise interest rates again this year, given recent inflation weakness, even though he predicts prices will take longer to rebound to the Fed’s goal.

“I’m sticking to my outlook that we’re on the right path,” Harker told the European Economics and Financial Center in London, according to his prepared remarks. “In the case of inflation, I’ve seen the factors exerting downward pressure as temporary.”

Fed Chair Janet Yellen spoke little about monetary policy, but reiterated her view that the Fed would raise interest rates slowly. She also said that she did not expect another financial crisis “in our lifetime”.

Gold was also supported by a sell-off in the U.S. equities. The tech sector started out weak after Alphabet (Google) was fined by the European Commission. This kept a lid on the Dow and S&P 500 Index. All three major indexes, however, turned lower after the Republicans decided to postpone the vote on healthcare reform until after July 4. This drove up demand for gold as a safe haven asset.

Forecast

Gold traders are going to continue to watch and react to the direction of the U.S. stock indexes on Wednesday, the U.S. Dollar and U.S. Treasury yields. The latter will be influenced by a number of economic reports including the Goods Trade Balance, Preliminary Wholesale Inventories and Pending Home Sales.

Simply stated, if U.S. Treasury yields continue to rise then gold’s upside will be limited or we may even see a sell-off. A drop in Treasury yields will be bullish for gold as well as a steep sell-off in stocks.