Price of Gold Fundamental Daily Forecast – Steep Drop in Equities May Be Needed to Fuel Upside Breakout

Gold prices rose on Tuesday as investors reacted to falling Treasury yields, a weaker U.S. Dollar and a drop in demand for higher risk assets.

December Comex Gold settled at $1282.90, up $4.00 or +0.31%.

The strength in U.S. producer inflation wasn’t important to investors because the market has already priced in a rate hike. Investors are more concerned about future rate hikes given the problems getting tax reform passed into law.

In economic news, U.S. producer inflation rose more than expected in October, boosted by a surge in the cost of services, leading to the biggest annual increase in wholesale inflation in over 5 ½ years.

According to the Labor Department, the Producer Price Index for final demand increased 0.4 percent last month after a similar gain in September. In the 12 months through October, the PPI jumped 2.8 percent, the largest increase since February 2002.

The PPI rose 2.6 percent year-on-year in September. Economists had forecast the PPI edging up to 0.1 percent last month and increasing 2.4 percent from a year ago.

Additionally, the high yield debt market was under pressure, as buyers moved into the safety at the long end of the Treasury curve. Traders blamed the volatility in the bond and stock markets on concerns that tax reform may not make its way through Congress successfully. The nagging issue for investors is the flattening of the yield curve. Traders fear that an inversion of the yield curve will signal that a recession is on the horizon.

In other news, according to the U.S. Commodity Futures Trading Commission, hedge funds and money managers raised their net long position in COMEX gold by 7,027 contracts to 173,562 contracts in the week to November 7.

Forecast

There are two key reports from the U.S. to watch on Wednesday, consumer inflation and retail sales.

The U.S. Consumer Price Index is expected to come in up 0.1%. The Core CPI is expected to show a rise of 0.2%. Core Retail Sales are expected to show an increase of 0.2% and Retail Sales are expected to show no gain.

Going into the CPI report, Fed Fund futures are pricing in around 80 percent, but some traders believe it could plunge to 50 percent if the number comes in weaker than expected. This would cause the U.S. Dollar to weaken, driving up demand for gold.

Gold traders should keep an eye on the price action in the equity markets. A failed tax overhaul would hit risk appetite and benefit gold.

Despite the strong surge in gold prices on Tuesday, the market is essentially trading where it was last Friday. This indicates that buyers are waiting for a major event to trigger an acceleration to the upside.

Concerns over North Korea, falling yields and tax reform may be enough to underpin the market, however, I think the catalyst for a major breakout in gold will be a deep plunge in equity prices.