Price of Gold Fundamental Daily Forecast – Risks Remain Skewed to Downside Ahead of Fed

Gold futures are edging higher early Wednesday as counter-trend buyers came in to defend support at $1795.00, and sellers arrived to protect the resistance at $1816.10. Technically speaking, the relatively tight trading range over the past two weeks suggests a breakout move is imminent. However, the success of such a move depends on the volume.

A market takes out tops and bottoms and highs and lows all the time, but it takes volume in the direction of the move to sustain any breakout rally or breakdown sell-off. Without it, the move will fizzle and fade. Often these move are fueled by buy stops or sell stops. The valid breakout occur when a market is bid or offered at the start of the move.

At 05:39 GMT, December Comex gold is trading $1809.70, up $5.70 or+0.30%.

Traders Hoping the Fed Creates Some Volatility

Let’s face it, gold has been a boring trade throughout the month of July so any help from the Fed that creates movement or volatility will be welcome. The last time gold really moved was June 16 and June 17 when the Fed surprised traders by moving up the time line of its first expected rate hike.

The day before the Fed announcement on June 16, December Comex gold settled at $1860.40. When the selling eventually stopped, gold had reached a low of $1754.50 on June 29. Currently, it is trading about $50.70 below its June 16 close and about $55.20 higher than its June bottom.

The question gold traders have to be asking ahead of the Fed announcements at 18:00 GMT on Wednesday is, “What can the Fed say that will bring gold prices back to its June 15 close?”

Now that the Fed has moved forward its expected first rate hike date, do gold bulls believe it will move it back to its original date? Do they believe the Fed will say “we didn’t discuss the start of tapering with great interest?” In my opinion, those are the two events that have to take place to generate strong buying interest in gold.

If the Fed continues to say that the rise in inflation is “temporary” or that we’re not worried about the new surge in COVID-19 cases and their impact on the economy then the message will be perceived as hawkish and gold prices will likely feel pressure.

What Has to Happen to Trigger a Rally?

There is the potential for a rally, however, with the yield on 10-year Treasury inflation-protected securities (TIPS) hitting a record low. Remember that low yields tend to be bullish because they reduce the opportunity cost of holding gold.

Straight up, if the Fed policymakers are across the board hawkish, gold stands little chance at posting a sustained rally. But if the Fed decision makers turn dovish or mixed, then we could build a case for a near-term short-covering rally.

Essentially, something bad has to happen to the stock market to rev up the gold bulls. Something has to happen that will drive investors out of stocks and into gold.

The low bond yields are a good item to monitor because when yields are this low, it tends to indicate that investors feel there is something wrong with the economy. And we all know that weaker economic readings tend to drive gold prices higher.

A fear could sweep the global equity markets rather quickly if Treasury yields plunge. We saw what an out of control bond market can do to the financial markets a little more than a week ago. If we see similar turmoil in the near futures then look for gold to rally.