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James Hyerczyk
Comex Gold

Gold prices plunged last week, producing its second largest loss of the year, on easing concerns over U.S.-China trade relations and a hard Brexit. Last week’s events drove up U.S. Treasury yields and demand for risky assets, encouraging investors to liquidate their positions in the so-called “safe-haven” gold market. The relationship between the U.S. Dollar and gold also fell apart.

Last week, December Comex gold settled at $1488.70, down $24.20 or -1.60%.

Correlation between Dollar and Gold Deteriorates

The U.S. Dollar started to weaken on October 10 as investors began dumping hedge positions in anticipation of a trade deal between the United States and China. Traders also sold hedge positions in the U.S. Treasurys, which made interest rates go up.

The weaker dollar was offset by rising interest rates so foreign demand for gold was unaffected. As you know, during usual market conditions, foreign demand for gold increases when the dollar fades, but this clearly was not the case on Thursday and Friday. This serves as proof that interest rates exert the biggest influence on non-yielding gold.


Pressured by Limited US-China Trade Deal

Gold was capped and pressured at the end of the week after President Trump said China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were to kick in this week.

Late in the session on Friday, Trump told reporters at the Oval Office that phase one of the trade deal will be written over the next three weeks.

As part of this phase, China will purchase between $40 billion and $50 billion in U.S. agricultural products. Trump also said the deal includes agreements on foreign-exchange issues with China. In exchange, the U.S. agreed to hold off on tariff hikes that were set to take effect Tuesday.

Additionally, Treasury Secretary Steven Mnuchin said both sides struck an “almost complete agreement” on currency and financial services issues. Phase two of the deal will “start almost immediately” after the first one is signed, Trump said.

Positive Developments over Brexit

According to reports, a Brexit deal could be clinched by the end of October to allow the UK to leave the European Union in an orderly fashion, Irish Prime Minister Leo Varadkar said after what he called a very positive meeting with Boris Johnson.

Weekly Forecast

Gold is likely to remain under pressure as long as Treasury yields continue to rise. Furthermore, a weaker U.S. Dollar is not expected to influence gold prices too much until all of the long-hedge positions in the greenback have been liquidated.

Traders should also pay attention to interest rates in Europe. The closer German debt yields move toward positive, the weaker for gold prices.

Some bullish traders are also saying that a U.S.-China trade deal could actually be positive for gold prices because of increased Chinese investor demand.

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