James Hyerczyk
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Comex Gold

Gold futures surged to a one-month high earlier in the session, but have since then given back more than half of those gains. The early strength was fueled by weaker demand for equities and a dip in U.S. Treasury yields.

Gold futures began to retreat from their highs after U.S. stock index futures turned higher. Yields also began to rise and the U.S. Dollar traded lower.

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I am seeing no signs of safe-haven buying. The moves in gold over the past week have all been driven by reactions to Treasury yields. The safe-haven assets remain Treasurys, the U.S. Dollar and the Japanese Yen.

The price action suggests risk aversion is the focus for investors. We’re seeing this in a number of markets including equities and ridiculously priced commodity-linked currencies like the Australia and New Zealand Dollars. Investors feel that they are overexposed in these higher-yielding assets and are reducing exposure.

Doubts Over a Fast Economic Recovery

If you read my comments on a daily basis, you know that I don’t like to call gold a safe-haven asset. Gold is an investment. Furthermore, interest rate instruments are the true safe-haven. And yields drive the price action in gold.

When investors buy Treasurys, rates move lower. When rates move lower, demand for non-yielding gold tends to go up. We’re looking at this scenario right now.

At 10:35 GMT, August Comex gold is trading $1757.80, up $4.80 or +0.27%.

With the number of global coronavirus cases rising, investors are raising concerns over the swiftness of the economic recovery. Given this outlook, investors are buying bonds since they are starting to price in the possibility that a weak economy will lead to additional fiscal and monetary stimulus. More stimuli will put pressure on interest rates, which of course is supportive for gold.

Last week, two U.S. Federal Reserve officials sounded increasingly pessimistic on the swiftness of any economic recovery from the virus and warned the unemployment rate could rise again if the disease is not brought under control.


Daily Forecast

Although Fed Chairman Jerome Powell recently said central bank policymakers are not anticipating negative interest rates that cannot stop the market from pricing in negative rates.

If the number of coronavirus infections continues to rise then the market will start to price in longer-lasting economic weakness. If futures traders start to price in negative interest rates then gold prices should surge to the upside, probably into a new high for the year.

I think this is what gold traders are anticipating. Traders should start to prepare for heightened volatility because of an anticipated clash because those who believe the Fed and those who believe negative rates are coming.

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