Price of Gold Fundamental Daily Forecast – Weaker on Increased Chances of Additional Rate Hikes

Gold futures are trading lower early Monday as investors continue to adjust positions in reaction to Friday’s stronger-than-forecast U.S. Non-Farm Payrolls report that solidified a June Fed rate hike while increasing the chances of at least two more rate hikes after that in 2018. Losses are likely being limited by worries over a potential global trade war.

At 0555 GMT, August Comex Gold futures are trading $1295.60, down $3.70 or -0.28%.

Summary

Stripping out the geopolitical headlines, the primary driver of the price action in gold remains U.S. Treasury yields. This was fairly evident on Friday when the labor report showed an acceleration in job growth, a drop in the unemployment rate to an 18-year low, and an increase in average hourly earnings.

With the labor market rapidly tightening, and concerns about inflation rising, traders believe the Federal Reserve will continue to raise rates gradually over the next two years. Prior to the release of the jobs report, gold was forming a support base as some speculators felt the Fed may only raise rates once after the widely expected June rate hike. Gold plunged after the report as the chances of two more rate hikes increased, driving Treasury yields higher as well as the U.S. Dollar. This make gold a less-desirable investment.

Finally, Italy formed a new government so that geopolitical event seems to have been taken off the table.

Today’s Influencing Factors

• There is only one minor U.S. economic report today. Factory Orders are expected to come in at -0.4%, down from the previously reported 1.6%. This report has to miss badly to get any reaction from gold traders.
• After the U.S. implemented tariffs on steel and aluminum last week against Canada, Mexico and the European Union, the parties involved placed tariffs on their own against a few U.S. goods. I think it’s a little too early to call this a “trade war”, but it certainly looks like a retaliation.
• Over the weekend, finance leaders of the closest U.S. allies vented anger over the Trump administration’s import tariffs. Essentially, they gave Washington a “stern rebuke”. Pretty scary response….not. However, at next week’s G7 summit in Quebec, they are likely to vent even more anger since they will have more time to put together a response.
• China and the U.S. ended another round of trade talks with the world’s second largest economy warning against further tariffs from the United States. Again, more words.
• Hedge funds and money managers raised their net long position in COMEX gold contracts to the strongest since late April in the week to May 29.

Forecast

Gold is likely to continue to trade sideways to lower unless there is a big drop in U.S. Treasury yields. Prices could plunge to a new low for the year if there is a jump in U.S. Treasury yields, say the 10-year U.S. Treasury yield moving back above 3 percent, for example.

Although we can’t really predict the geopolitical headlines, we do have an idea of what the market will do. With Italy’s problems fixed, at least temporarily, the focus for speculators may shift to Spain and its turmoil. Traders also should continue to monitor the events leading up to President Trump’s meeting with North Korean President Kim Jong-un, scheduled for June 12.

With a lid kept on geopolitical events and investors slowly pricing in additional Fed hikes, I think gold prices are likely to remain under pressure today.