Price of Gold Fundamental Daily Forecast – Traders Selling on Rising Yields, Ignoring Weaker US Dollar

Gold futures are sharply lower on Thursday despite a weaker U.S. Dollar. The catalyst behind the move is higher U.S. Treasury yields. If you follow the theory that a weaker dollar is supportive for gold then you’re probably confused by the market’s weakness. But keep in mind that the theory is valid over the long-run and that silly things can happen on a day-to-day basis.

The correlation between Treasury yields and gold is a lot clearer. This is because gold doesn’t pay a dividend to hold it. So when yields rise, investors tend to chase them. The relationship is pretty cut and dry.

The relationship between the U.S. Dollar and gold is clear over the long-run , but over the short-run, it can be quite volatile. It all depends on the fundamentals driving the movement in the greenback.

When the U.S. economy is prospering and interest rates are higher or rising, the dollar is a more attractive asset. A stronger dollar reduces demand for dollar-denominated gold in this case.

When the dollar is supported by safe-haven buying, gold can move in either direction. When investors sell the dollar because the threat driving the safe-haven buying has dampened, gold doesn’t necessarily move higher. This is probably what is going on today.

On Thursday, the Fed said it is prepared to taper, but it doesn’t know when it will begin. This news may be enough to put a lid on gold prices.

When the Fed said that more Federal Open Committee (FOMC) policymakers favor moving up the date of the first interest rate hike from 2023 to 2022 then Treasury yields firmed and gold prices fell.

The easing of tensions over China’s Evergrande is also encouraging investors to dump gold. That’s another story altogether. Hedgers bought gold on Monday when the threat of default by Evergrande drove global stock markets sharply lower. Investors bought gold for protection or a hedge against a further decline.

Now that the threat of default by Evergrande has dissipated and demand for riskier assets has returned to near normal, stock market investors don’t see the need to hedge their positions. So they are liquidating their hedges. At least that’s how I see.

Daily Outlook

Today’s weakness in the dollar and gold is being partially driven by long liquidation due to increased demand for riskier assets. Remember that both went up on Monday when stocks were selling off sharply. Well those buyers are getting out.

Investors are no longer focused on stock market risk. They have shifted their interest to the Fed. The central bank’s comments on Wednesday were hawkish . Higher yields usually follow hawkish comments and when yields go up, gold tends to go down.

Investors are chasing yields or investments that pay them. Gold doesn’t pay you to hold it so it’s not in high demand. Overtime, the normal relationship between the dollar and gold will return, just not today, it appears.