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James Hyerczyk
Comex Gold

Gold is extending its earlier losses on Wednesday following the release of better-than-expected U.S. economic data that suggests the economy may be on the path to recovery from the impact of the coronavirus pandemic, sooner than expected.

The market has been under pressure from the get-go after global equity prices jumped to multi-month highs earlier in the session. The move highlights the growing optimism over the global economic recovery. Despite the jump in demand for riskier assets, some traders are saying losses are being limited by a weaker U.S. Dollar and worries over the civil unrest in the United States.

At 13:32 GMT, August Comex gold is trading $1709.50, down $24.50 or -1.41%.

The bottom-line is gold is losing its luster because the global economy is improving. This diminishes the chances of additional fiscal and monetary stimulus moves by the government and central banks, respectively.

Gold went as far as it could with the previous stimulus packages, hitting a multi-year high in April. However, gold hasn’t made a new high in nearly two months which indicates all the previous aid packages have been priced-in.

Furthermore, I’m not getting the relationship between the civil unrest in the United States and gold prices. An escalation of the civil unrest is not likely to drive gold prices higher unless it destroys the economy so much that the government and the Fed are forced to pump more money into the economy.

Traders are watching how the rest of the world is recovering from the coronavirus pandemic – particularly China, Australia and New Zealand – and projecting those numbers on the U.S. economy. So unless there is a major setback in the economic recovery, gold is going to have a hard time finding buyers.

I know the gold bugs are going to disagree with that statement. They’ll continue to fall back on the huge amounts of stimulus already pumped into the economy, and try to build a case for $2000 gold with it. But gold investors had their chance to drive prices into this level when the global equity markets were crashing, but they stopped buying.

Stocks are trading at a three-month high because of the stimulus, and because investors are looking forward and projecting a recovery. The gold rally in the meantime has stalled because investors are taking profits on their long positions and moving the money into higher-yielding assets.

When stocks were down and traders were pricing in negative interest rates, gold was attractive because it didn’t matter that it didn’t pay interest or a dividend to hold it.

Now that traders are looking for yield again, gold has become an unattractive asset. Investors realize that gold is an investment, and they want to get paid to hold it. Unfortunately, gold isn’t going to pay them anything to hold it.

Additionally, gold and the U.S. Dollar are losing their attractiveness as a hedge against a major recession and a stock market crash. Traders who used gold as a hedge are also trimming those positions.

Everybody seems to be unloading gold for various reasons so we expect to see further weakness until it reaches a value area. Right now, that 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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