Price of Gold Fundamental Weekly Forecast – Are Buyers Propping Up Prices in Anticipation of Stock Market Correction?

Gold finished marginally lower last week in a mostly listless trade. Volume was extremely light and the market remained rangebound for the fifth straight week as traders continued to look for new catalysts to refresh volatility and drive the market in a big way in either direction.

A little more than a week ago the market lost two major catalysts that were providing support:  The U.S.-China trade dispute and the Brexit uncertainty.

Last week, stronger than expected U.S. economic data helped support the idea that the Federal Reserve would refrain from further rate cuts in 2020. This news helped raise Treasury yields, turn the U.S. Dollar into a more attractive assets and weaken foreign demand for dollar-denominated gold.

Last week, February Comex gold settled at $1480.90, down $0.30 or 0.02%.

Also helping to keep a lid on gold prices was strong demand for risky assets. U.S. stocks hit record highs last week and the strong close indicated the rally could extend into the holiday-shortened week.

Last week, President Trump was impeached by the U.S. House of Representatives. The financial markets showed little response to the news and there was little evidence that gold traders were using the news as a reason to increase hedge positions.

Weekly Forecast

It’s hard to come up with solid reasons why gold is being supported. The reasons are pretty clear why there is a lid on prices, however.

We can speculate that gold is being supported by traders betting that the possibly overextended stock markets may be ripe for a near-term correction. Taking out the steep breaks in May and August, the stock market has basically been straight up since December 24, 2018. So maybe it is.

Despite the holiday-shortened week, traders may decide to take profits ahead of the new year. Traders watch anniversary dates of major lows and major highs so watch the price action on Christmas Eve. It may be light, but it could also be enough to put in a high in the stock market.

The selling may not be enough to change the trend to down, but it could be enough to fuel a reasonable correction, fueled by profit-taking and end of the year re-balancing. If the break is strong enough, money could flow into gold, finally sending prices above recent resistance areas.

We don’t know for sure if things will pan out as forecast, but it’s a start. There is a correlation between gold prices and demand for risk.

Furthermore, gold and stocks could move in the same direction. Gold is up about 15% this year and the benchmark S&P 500 Index has risen about 30%.

However, the direction of Treasury yields tends to have an even greater inverse relationship with gold. So in order to get gold really moving to the upside, Treasury yields are going to have to spike lower, and that’s not likely to happen unless the stock market plunges.

So once again, we have to conclude that in order to get gold prices moving higher, stocks are going to have to break sharply.