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James Hyerczyk
Gold

Gold futures plunged into their lowest level since April 21 as it continued to lose its safe-haven appeal amidst unprecedented demand for higher-yielding, higher-risk assets. In other words, investors were selling gold and buying stocks.

On Friday, August Comex gold settled at $1683.00, down $68.70 or -3.92%.

Sellers were also influenced by a higher spike in Treasury yields and a reversal to the upside by the U.S. Dollar against a basket of currencies.

The price action was pretty basic and almost textbook. Portfolio managers need cash to buy stocks because they are getting more expensive as investors continue to bet on a rebound in the economy from coronavirus pandemic devastation.

They are getting their investment capital by lifting hedges in safe-haven gold, Treasurys and U.S. Dollars.

The selling of Treasury Notes and Bonds is also driving up Treasury yields. This may help to firm the U.S. Dollar. A strengthening greenback could reduce foreign demand for gold, putting it in a position to weaken further.

Much Better than Expected US Jobs Data Was the Catalyst Behind Friday’s Moves

The U.S. economy unexpectedly added jobs in May after suffering record losses in the prior month, offering the clearest signal yet that the downturn triggered by the COVID-19 pandemic was probably over, though the road to recovery could be long.

The Labor Department’s closely watched employment report on Friday also showed the jobless rate falling to 13.3% last month from 14.7% in April, a post-World War Two high.

The survey of establishments showed payrolls rose by 2.509 million jobs last month after a record plunge of 20.7 million in April. Economists polled by Reuters had forecast payrolls falling by 8 million jobs. They had expected the survey of households to show the unemployment rate jumping to 19.8%.

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Short-Term Outlook

The recent price action in gold suggests the precious metal was overpriced given current economic and COVID-19 conditions. These are short-term indicators in my opinion. There is still a long way to go before the economy completely recovers and the spread of the COVID-19 virus is contained. Because of these uncertainties, it makes sense to maintain a bullish longer-term outlook.

Short-term buyers using long-term fundamentals are the ones taking the heat. And they could continue to feel pain until the market reaches a value zone. The undercapitalized buyers are likely to bailout at the time when the longer-term buyers are getting ready to step back in. We think this value or buying area is $1621.90 to 1582.40.

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

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