Price of Gold Fundamental Daily Forecast – Watch Treasury Yields, Not the Dollar

Gold is trading higher on Friday, but inside yesterday’s whipsaw range as investors continue to digest the impact of Thursday’s European Central Bank interest rate and monetary policy decisions. The price action the last two days indicates investor indecision and impending volatility. Later today, investors will get a chance to react to a report on U.S. retail sales and consumer confidence.

At 10:08 GMT, December Comex gold is trading $1514.30, up $6.90 or +0.46%.

On the bullish side, gold is being supported by a weaker U.S. Dollar Index. The dollar is being pressured by a stronger Euro.

Perhaps keeping a lid on prices are increasing demand for risk and rising U.S. Treasury yields.

Euro Causing Volatility

On Thursday, the European Central Bank (ECB) cut its deposit interest rate by 10 basis points to a record low of minus 0.5% and said it would restart bond purchased at a rate of 20 billion Euros a month from November 1 for an indefinite time.

Gold rallied after the ECB’s announcement, but then retreated after a report from Bloomberg said ECB President Mario Draghi faced opposition from several key ECB members to his decision to implement quantitative easing. This news also drove the Euro sharply higher after it had crashed earlier to a 2 ½ year low.

On Friday, the Euro is rising again and the dollar index is breaking sharply in reaction to higher German government bond yields amid reports that investors feel the ECB is done stimulating the ailing Euro Zone economy.

Daily Forecast

A tricky situation is developing for gold investors. Higher yields tend to be bearish for gold, but a weaker dollar is usually supportive for dollar-denominated gold.

Furthermore, what message is the ECB sending to investors? Are they saying they are out of bullets and can’t fight the Euro Zone’s economic slowdown with conventional monetary policy weapons anymore? Are they saying that the Euro Zone economy can only be saved by a combination of both monetary and fiscal stimulus?

With gold traders facing these questions, the market could become rangebound especially since investors still have to deal with next week’s U.S. Federal Reserve and Bank of Japan interest rate and monetary policy decisions.

I tend to go to the Treasury markets whenever I have to answer a question about a market. In this case, if Treasury yields continue to rise then I expect gold to be capped. A lower U.S. Dollar is just a function of a stronger Euro so although we can see a technical bounce in gold due to the weakening dollar index, I don’t think we’ll see a trend changing event.