Price of Gold Fundamental Weekly Forecast – Could Have Hard Time Sustaining Rally if Safe-Haven Buyers Return to Dollar

Gold futures closed higher last week, settling at its highest level since the week-ending July 13. The rally was fueled by a combination of heightened volatility in U.S. equity markets, a drop in U.S. Treasury yields and a weaker U.S. Dollar. The catalysts fueling the price action was the U.S. Federal Reserve, concerns over a potential U.S. recession and worries over a U.S. government shutdown.

Last week, February Comex gold futures settled at $1258.10, up $16.70 or +1.35%.

Fed Recap

Although the U.S. Federal Reserve raised its benchmark interest rate 25 basis points as expected, while voting to retain the core of its plan to tighten monetary policy, despite rising uncertainty about global economic growth, gold prices rallied. The move came as a surprise to most traders who felt the Fed came across as more dovish than expected.

U.S. Dollar Impact

With the Fed coming out more dovish than anticipated, one would have expected a rally in the U.S. Dollar. This didn’t happen, however, as the dollar plunged because the Fed reduced the number of rate hikes in 2019 from three to two. Furthermore, U.S. Treasury yields plunged as investors began to price in the possibility of a U.S. recession sometime in the future.

Government Shutdown

The government shutdown had very little positive impact on gold prices last week. In fact, based on Friday’s price action, it may have had a negative impact. This is because the threat of a government shutdown encouraged investors to seek shelter in the U.S. Dollar ahead of the long Christmas holiday weekend.

Forecast

It’s been largely accepted that the U.S. Federal Reserve’s failure to reassure investors that they understand the risks across global markets fueled demand for safe-haven gold. This may last over the short to medium term. However, ultimately, it’s going to come down to the direction of the U.S. Dollar.

If Treasury yields keep falling then the dollar is likely to become a less-desirable asset. This would be potentially bullish for gold.

If stock market volatility and weakness continues then this may drive investors back into the U.S. Dollar for protection. In this case, gold is likely to weaken.

There is no question that safe-haven buying is the theme at this time, but there is uncertainty over whether investors prefer the U.S. Dollar or gold. My best guess says investors prefer the dollar because it’s easier to move in and out of the asset. In other words, liquidity will ultimately decide whether gold goes up or down. Investors are also using the Japanese yen for safety, further limiting gold appeal.

During the Christmas/New Year period, volume tends to drop which means we could see exaggerated moves in the financial markets. The key to trading successfully is to avoid getting trapped on weak breakouts and breakdowns. This weak more than any other, you’re going to have to pay close attention to the volume.

As far as reports are concerned, there is only one major, the Conference Board’s Consumer Confidence. I don’t think investors are going to be paying too much attention to economic reports at this time anyway. They are saving their ammunition for the U.S. Non-Farm Payrolls report, due on January 4.