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James Hyerczyk
Gold Bars and Dollar

After consolidating for four sessions while straddling last year’s closing price at $1294.20, gold prices are spiking higher on Monday in reaction to a drop in the U.S. Dollar. The catalyst behind the move is risk aversion, fueled by a decline in global equity markets.

Traders can’t pinpoint the exact reason for the shedding of risky assets. Most traders agree the selling pressure in the financial markets is being fueled by one or more of the following factors:  Brexit concerns, worries over a global economic slowdown, uncertainty over U.S.-China trade relations, and profit-taking ahead of the start of U.S. earnings season on Friday.

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At 08:39 GMT, June Comex gold is trading $1301.40, up $5.80 or +0.45%.

Traders should also note that the U.S. Dollar appears to have lost its luster as a safe-haven asset, at least temporarily. Money appears to be leaving the stock market and entering traditional safe-haven assets such as gold, Treasurys and the Japanese Yen.

U.S. Non-Farm Payrolls Report

The internals of the U.S. Non-Farm Payrolls report may be exerting the most negative pressure on the dollar today as well as demand for higher risk assets. The headline number was bearish for gold, but weaker-than-expected average hourly earnings suggests the Fed may have been right in turning dovish on policy at its last meeting. Furthermore, traders are saying that despite the economy adding 196K jobs in March and February’s payroll being jacked up to 33,000 jobs from 20,000 jobs, positions were lost in manufacturing, which could be a bad signal for the sector.

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According to the Commodity Futures Trading Commission (CFTC), hedge funds and money managers slashed their bullish wagers in COMEX gold in the week to April 2.

Additionally, holdings in the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, also fell as much as 3 percent in the previous week, its biggest weekly percentage decline since the end of November 2016.

Daily Forecast

The current rally in gold, whether it be short-covering or fresh speculative buying, may last until Wednesday’s release of the minutes from the Fed’s last monetary policy meeting. Gains may even be extended beyond that if the minutes reveal a more dovish central bank.

It’s also interesting to note the liquidation taking place in the gold market. The futures showed hedge funds and money managers reducing positions. While in the cash market, individual investors sold gold. We’ll be watching to see if this represents the start of another leg down in the market, or it was a play to shake out some of the weaker longs before a new rally begins.

As for the rest of the session on Monday, the direction of gold will likely be dictated by the direction of the U.S. Dollar and investor appetite for risk. The best scenario for bullish gold traders will be a weaker dollar and a plunge in equity prices.

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