Price of Gold Fundamental Daily Forecast – Rising Yields, Risk-On tone Limiting Gains

Gold surged to its highest level since March 25 on concerns that a slowing U.S. economy would lead to a rate cut by the Fed and a weaker U.S. Dollar. A decline by the greenback would increase foreign demand for dollar-denominated gold. The rally isn’t about safe-haven demand, it’s about value and gold’s relationship to other asset classes. If you treat gold like an investment, you’ll have an easier managing the risk.

At 10:59 GMT, August Comex gold is trading $1331.60, up $3.60 or +0.27%. Its intraday high is $1334.10 so we’ve seen some backing away from the high. Traders are also showing respect for a major technical level at $1332.60.

The key price drivers remain lower Treasury yields, lower demand for risky assets and a lower U.S. Dollar. Some of the earlier rally was helped by a rate cut by the Reserve Bank of Australia. This followed a rate cut by the Reserve Bank of New Zealand last month. Gold traders could be betting that the dovish central bank trend continues with perhaps a rate cut by the European Central Bank or the Bank of England. We already know that U.S. futures markets are indicating a Fed rate hike for later in the year.

Comments on Monday from St. Louis Federal Reserve President James Bullard indicate that later in the year could be the June meeting in two weeks.

Bullard became the first Fed official to say recent events may require a central bank response. He cited rising risk to economic growth posed by global trade tensions as well as weak U.S. inflation as key reasons why a U.S. interest rate cut “may be warranted soon”.

In making his comments, Bullard also acknowledged that the Fed cannot respond to every change in the rapidly changing U.S. trade policy with top trading countries and that particular move by the current administration have created “an environment of elevated uncertainty…that could feed back to U.S. Macroeconomic performance” as the global economy slows.

According to Bullard, the Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty, he said. In addition, both inflation and inflation expectations remain below target, and signals from the Treasury yield curve seem to suggest that the current policy rate setting is inappropriately high.

Aside from weak inflation and other warning signs from the U.S. bond market, “a downward policy rate adjustment may be warranted soon” to help boost inflation expectations and help ease fears that have emerged in bond prices of a sharper-than-expected U.S. slowdown.

“A downward adjustment of the policy rate may help re-center inflation and inflation expectations at the 2 percent target,” as well as provide “insurance” against a sharper than expected economic slowdown, Bullard said, comparable to rate cuts the Fed made in the mid-1990s to nudge along that expansion.

Daily Forecast

The reaction to key technical levels at $1332.60 to $1335.70 may be indicating the presence of sellers. More importantly, September 10-Treasury Notes did not make a new high overnight and are currently trading lower. Stocks are edging higher also after posting a potentially bullish closing price reversal bottom on Monday.

Yields and stocks are slowing down the gold market rally. If the Dollar Index takes off to the upside then look for gold prices to break.