Price of Gold Fundamental Daily Forecast – Short-Covering Rally, or Are New Longs Chasing?

Gold is trading higher late Tuesday as buyers took advantage of thin trading conditions and spiked the futures market to a new contract high. The gain from the previous main top at $1796.10 to today’s high at $1804.00 was only $7.90 so I wouldn’t call it a “true’ breakout. In fact, a break back under $1796.10 would indicate that the move was fueled by buy stops and short-covering rather than new buyers.

At 19:55 GMT, August Comex gold is trading $1798.60, up $17.40 or +0.98%.

The pop in gold came as a surprise because stocks were up and Treasury yields were higher. However, the U.S. Dollar posted a wicked two-sided trade against a basket of currencies, and spent the day mostly lower so the upward spike was likely triggered by the volatile greenback.

Gold bulls cited generally lower Treasury yields, U.S. states reversing re-openings and closing businesses to combat a spike in cases and a dire warning from Fed Chair Powell as the catalysts behind the move. Powell said in congressional testimony that the outlook for the world’s biggest economy was “extraordinarily uncertain”.

U.S. Economic News

U.S. economic data on Tuesday was mixed but mostly better. The S&P/CS Composite-20 Home Price Index came in higher than expected at 4.0%. The number exceeded both the forecast and the previous read. The report was further proof of an improving housing market.

The Chicago PMI report was a disappointing 36.6. This was better than the previously reported 32.3, but below the 45.0 forecast.

The Conference Board’s Consumer Confidence report was an impressive 98.1. This was well above the 91.6 forecast and downwardly revised 85.9 previous read.

Short-Term Outlook

I’m not trying to dampen the enthusiasm of the rally to a new contract high. I’m just making an observation that the buying could have actually been weak, and perhaps not even fueled by new longs at all, but rather short-covering. This is to inform traders that they should be careful about chasing the market higher at current price levels.

We know the reasons to be long gold over the long-run, but the short-term plays have been tricky since April. Most of the money made in playing the long side of gold since April has been coming from buying dips, not buying upside breakouts. Based on this assessment, I stand by my warning, be careful buying strength and chasing gold higher.

For a look at all of today’s economic events, check out our economic calendar.