Price of Gold Fundamental Daily Forecast – Will Struggle if Investors Seek Protection in US Dollar

Gold futures are trading lower on Tuesday with the market moving lock-step with weakness in the equity markets. This trading pattern has been prevalent since early March when a steep plunge in the global equity markets forced gold investors to sell their holding to cover stock market losses and margin calls.

Last week, it looked like the relationship between gold and stocks was returning to normal as demand for risky assets rose and gold weakened, but today, it looks like traders are once again correlating the two assets.

At 11:11 GMT, June Comex gold is trading $1685.50, down $25.60 or -1.50%.

Today, there is also early evidence of safe-haven buying, with investors moving money into the U.S. Dollar, Japanese Yen and Treasurys, in anticipation of heightened volatility in the U.S. stock markets.

Gold traders should be paying particular attention to the rise in the U.S. Dollar since a higher greenback tends to weigh on demand for dollar-denominated gold.

The U.S. Dollar is trading especially higher against a basket of commodity-linked currencies due to the steep plunge in crude oil prices.

Shortly before the regular session opening on Tuesday, U.S. June WTI crude oil prices are already down about 18% and the expiring May futures contract is trading below $0.

The steep drop in crude oil prices is upsetting stock market investors enough to encourage them to take profits after a two week rally. Early indications are for a “risk-off” session, which means lower stock prices throughout the day and increased demand for the safe-haven U.S. Dollar. Both moves should factor into lower gold prices.

Deflationary Concerns Weighing on Gold

Gold is used as a hedge against oil-led inflation and a fall in crude prices increases deflationary pressures.

In the longer-term, “a falling oil price is disinflationary and thus weighs on gold as one of many factors. (But) gold went up last night as the meltdown in oil inspired safe-haven buying,” said Jeffrey Halley, senior market analyst at OANDA.

However, the early rally looks like another failed “knee-jerk” reaction by the gold bulls trying to find reasons to continue the rally in gold.

Over the short-run, gold is going to be volatile, posting two-sided trades at times as traders react to the ever-changing headlines and the up and down action in the U.S. Dollar. This type of price action is going to continue as long as traders look at the U.S. Dollar as a safe-haven asset.

Over the long-run and as the global economy starts to recover from the coronavirus pandemic, traders aren’t going to need the U.S. Dollar for protection. Furthermore, with so many dollars floating around due to fiscal and monetary stimulus, the greenback is likely to weaken, and that will give investors a reason to buy more gold.