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James Hyerczyk
Gold

Gold futures are edging lower on Tuesday in reaction to a rebound in the U.S. Dollar. Foreign demand for dollar-denominated gold tends to drop when the dollar rises. The greenback found some traction, as risks from rising coronavirus cases offset strong economic data and kept a lid on confidence in an economic recovery from the COVID-19 pandemic.

At 07:22 GMT, August Comex gold is trading $1791.70, down $1.80 or -0.10%.

Although the market is lower, the price action indicates more of a steady performance with buyers reacting to the robust climb of coronavirus cases and sellers moving on improving economic data. Investors seem to be loading up on higher-yielding equities because interest rates are so low, but at the same time, they are buying gold as a hedge against a potential stock market crash.

The longer-term fundamentals remain constructive for gold, but there is short-term risk of a correction.

Traders Focusing on the Dollar

Following yesterday’s slide, the U.S. Dollar is moving higher against most major currencies, while clinging near a two-week low against a basket of currencies. Essentially, the greenback is tracking the movement in the equity markets.

One indication that risk may be off today is the price action in the higher-yielding Australian Dollar. The Aussie pulled back from a one-month high after the country’s second-most populous state announced six weeks of stay-at-home restrictions and a lockdown for the city of Melbourne to curb rising cases.

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Daily Forecast

Monday’s price action was very confusing, which could mean we’re nearing a “make or break” point in gold. The much better than expected ISM Non-Manufacturing PMI report should’ve driven gold prices lower because it dampened the need for additional stimulus from the government and Federal Reserve.

My take is that gold traders may be finally realizing the importance of reacting to “stale news” and forward-looking data. The ISM Services PMI report is “old news”. It represents data from June when most of the U.S. was still reopening. I don’t think it properly reflects the surge in COVID-19 cases late in the month and early July.

If gold traders become more forward-looking then I can build a case for a breakout to the upside as investors will buy in anticipation of new stimulus. However, if investors continue to turn to the U.S. Dollar for safe-haven protection then gold will have a hard time sustaining a breakout to the upside.

I maintain that the next major move in gold will be determined by Thursday’s Initial Claims report. If the report shows a surge in unemployment claims than look for volatility to hit all markets.

There are still two sides to look at over the short-run which may be the reason for the sideways price action. If stocks break sharply then traders may sell gold to raise cash to cover margin calls and losses. Gold could also be pressured by a stronger U.S. Dollar.

On the other hand, if U.S. interest rates start to fall again then gold may find some support. Additionally, if the economic reports start to top-off then this could also be supportive for gold.

Right now, I’m seeing reasons for volatility and a two-sided trade, but I may gain confidence on a direction once I see how traders react to Thursday’s initial claims report.

Over the short-run, it may be a good idea to keep your powder dry. After all, the long-term trend is still bullish and isn’t even being threatened. Furthermore, we’ve seen since April that more money is being made buying gold on dips than buying strength.

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

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