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James Hyerczyk
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Comex Gold

Gold futures are trading lower on Friday in a subdued trade ahead of the release of key U.S. economic data later in the session that could lead to a major change in Federal Reserve policy. The market is being capped by firm U.S. Treasury yields and underpinned by a drop in the U.S. Dollar against a basket of major currencies.

At 08:59 GMT, December Comex gold futures are trading $1790.10, down $4.30 or -0.24%.

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Due to the elongated sideways trade, even fundamental traders are paying close attention to the technical chart pattern especially the 50% levels at $1795.00 and $1800.00.

Technicians are looking for an upside bias to develop on a sustained move over $1800.00 and for the downside bias to extend on a sustained move under $1795.00.

Treasury Yields Rise Ahead of Inflation

U.S. Treasury yields rose early Tuesday, ahead of the release of closely watched inflation data later in the morning. Treasury yields are a major influence on the direction of gold prices. This is because gold doesn’t pay any interest to hold it. So when yields rise, gold becomes a less-desirable asset.

The yield on the benchmark 10-year Treasury note climbed nearly 2 basis points to 1.341%. The yield on the 30-year Treasury bond added 1 basis point at 1.917%.

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Dollar Steadies Below 2-1/2 Week High Before Inflation Data

The U.S. Dollar steadied below a 2-1/2 week high that was hit the previous session, as investors braced for inflation data that might offer clues on the timing of policy tightening by the Federal Reserve at its September 21-22 meeting.

The direction of the dollar at times also drives the price action in gold but not as strongly as Treasury yields. Gold is a dollar-denominated asset so when the greenback is strong, foreign demand for the precious metal tends to drop. A weaker dollar tends to be supportive for gold prices. This assessment may not adhere on a day-to-day basis, but over the long-run it tends to be valid.

Daily Forecast

Gold investors will be watching today’s U.S. Consumer Price Index (CPI) report very closely because it will likely influence next week’s Federal Reserve decision on tapering its massive stimulus. The report is due to come out at 14:30 GMT.

Economists expect core consumer price inflation, an index which strips out volatile energy and food prices, to have risen 0.3% in August from July.

High inflation is the major reason why the Fed can’t keep pumping stimulus into the economy. If the CPI data comes in higher-than-expected then look for the same reaction we saw last week when the U.S. reported stronger-than-expected producer price inflation – Yields and U.S. Dollar up, gold prices down.

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