Price of Gold Fundamental Weekly Forecast – CPI Report On-Tap, but Focus Remains on Tax Reform Issues

Gold remained rangebound for a third week but still managed to eke out a small gain. The price action indicates that the market is going to need some help from falling Treasury yields, a weaker U.S. Dollar and lower demand for risky assets in order to attract enough buyers to drive this market higher.

December Comex Gold futures settled at $1274.20, up $5.00 or +0.39%.

A plunge in U.S. Treasury yields on November 6 spiked gold prices to the upside. Additionally, the flattening of the yield curve may be an indication that investors are beginning to price in a recession. Gold was trading comfortably higher late in the week but an expected plunge on Friday erased most of the market’s gains.

Traders had no answer for the plunge in prices, but it may have been related to the thin-volume on Friday due to a U.S. banking holiday.

Supporting gold prices most of the week was a weaker U.S. Dollar. It was under pressure due to the lack of clarity over U.S. tax reform. This raised issues about the aggressiveness of the Fed in hiking rates in 2018 and 2019, driving down U.S. Treasury yields and encouraging investors to book profits in the stock market.

There were no major U.S. economic reports last week but with a rate hike in December a done deal, the focus was likely to be on tax reform anyway. The key story last week played out this way.

Disappointment with a tax bill put forth by U.S. Senate Republicans that would delay corporate tax cuts dominated the trade in all asset classes late last week. Risky assets such as the U.S. Dollar and U.S. equity markets lost ground while money flowed into safe haven assets such as gold and the Japanese Yen. The tone set on the weekly charts suggests the story may linger for some time.

According to CNBC, the Senate Republican’s bill to rewrite the tax code differed from their House counterparts’ plan. Like the House version, the Senate’s proposal would cut the corporate tax rate to 20 percent from 35 percent, but the Senate plan would delay implementation until 2019.

The politicians suggest this process is normal, however, the market action suggests investors want clarity.

Additionally, both plans call for a tax on $2.6 trillion in foreign profits held offshore by U.S. multinationals. The Senate wants that tax to be 12 percent for cash and liquid assets, and 5 percent for non-liquid assets. The House amended its bill on Thursday, going to 14 percent and 7 percent respectively.

Furthermore, both bills would add $1.5 trillion over 10 years to the U.S. budget deficit and national debt, which in the past would likely have faced criticism from Republicans.

Forecast

This week’s price action is likely to continue to be influenced by the direction of U.S. Treasury yields, the U.S. Dollar and the U.S. stock market. Gold could surge if all come in weaker.

Traders will also get the opportunity to react to the latest economic data on Producer Inflation, Consumer Inflation, Retail Sales and Building Permits. Fed Chair Janet Yellen is also expected to speak on Tuesday.

Despite the number of major reports, the key market driving force will be the tax reform issue. This could influence the market until the end of the year.