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James Hyerczyk
Comex Gold

Despite heightened concerns over U.S.-China relations, gold futures traded mostly sideways last week with a slight bias to the upside. The price action revealed that investors showed little interest in the asset as a safe-haven investment. Instead, they preferred to hedge against stock market risk in the more-liquid Japanese Yen and U.S. Treasurys.

Last week, June Comex gold settled at $1287.40, up $6.10 or +0.48%.

Gold is often called the “go-to” market during times of geopolitical risk, but over the last several years, this has not been the case with most investors preferring higher liquidity hedges like Treasury, Yen and Swiss Franc. There are times when the U.S. Dollar has also been used as a safe-haven asset.

Ultimately, it all comes down to the direction of U.S. interest rates. Although Fed policy has been dovish since late January, the dollar has remained relatively strong. And this has had a negative impact on gold prices.

U.S. Treasury rates have fallen since earlier in the year, but gold has remained under pressure because the divergence in the monetary policies of the U.S. Federal Reserve and the other major central banks continues to make the U.S. Dollar a more attractive investment.

Weekly Forecast

Gold futures will pick up a bid this week if the U.S.-China trade dispute escalates to the point where investors become concerned about a recession in the United States. If this concerns develops the investors will start pricing in a Fed rate cut. Treasury yields will fall and gold prices will rise. This is what the gold bulls need to see.

If the financial markets remain relatively calm and the two economic powerhouses agree to continue to work out their differences through negotiations then rates will remain steady and gold prices will remained capped.

Treasury and gold traders will also remain sensitive to U.S. economic data because weak results could also move the U.S. economy towards a recession. This would also drive Treasury yields lower, which would be supportive for gold prices.

This week’s reports include U.S. Retail Sales and Core Retail Sales.

So in effect, it’s not the geopolitical turmoil per se that will drive gold higher, it’s how this turmoil affects the U.S. economy and whether it drives it into a recession that would force the Fed to cut rates.

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