Price of Gold Fundamental Weekly Forecast – ECB Policy Decision Could Determine Direction This Week

Gold futures closed higher last week but once again, the price action suggested a cautious trade fueled by short-covering and buy stops rather than new buying. This indicates a reluctance to buy strength which is the true indicator of a bullish market. Rather than being proactive, gold traders are being reactive, which does not indicate much confidence in playing the long side.

Last week, December Comex gold futures settled at $1833.70, up $14.20 or +0.78%.

Giving the market a charge late last week was the disappointing U.S. Non-Farm Payrolls report. Notice that I didn’t write “weaker-than-expected” report. This is because the report was not ‘weaker-than-expected’ per se. The headline number missed, but the unemployment rate fell as much as expected and average hourly earnings rose.

Gold likely rallied last week in response to the headline number because investors were anticipating a higher number and in doing so, they were shorting the gold market. So when the number did not come in as expected, they covered their short-positions. That was the smart thing to do.

The fact that the unemployment rate fell to 5.2% and that average hourly earnings rose 0.6% probably prevented new buyers from entering the market.

Fed Chairman Powell has stated that while tapering of its stimulus could begin this year if job growth continues, the central bank was in no hurry to do so.

In August, the U.S. job market grew, but by a lower-than-expected amount. This probably was small enough to prevent the Fed from making a tapering announcement at its September 21-22 monetary policy meeting. However, there is still time for the announcement at the November or December meetings.

Meanwhile, the Bank of Canada (BOC) has raised rates, the Reserve Bank of New Zealand (RBNZ) is likely to raise rates on October 6, the Reserve Bank of Australia (RBA) is tapering its bond purchases and the European Central Bank (ECB) may indicate a future tightening when it meets on Thursday.

I don’t think the Federal Reserve wants to be left in the dust so I think it will eventually join the tapering party sooner rather than later. I think this is what is preventing a major rally in gold. There is room to the upside over the near-term, but that move will likely set up the next shorting opportunity.

Weekly Forecast

There are some gold bulls out there saying that a stock market crash will drive gold prices sharply higher. This could happen if the Fed decides to flood the market with cash, driving yields lower and dragging down the U.S. Dollar.

However, if traders decide to use the U.S. Dollar as a safe-haven asset then gold prices could be capped. Gold doesn’t automatically go up when there is a stock market crash, it all has to do with what the U.S. Dollar does. Gold is an expensive safe-haven asset. Furthermore, if traders believe the global economy is weakening then they could begin to move money into the U.S. Dollar and Japanese Yen.

Finally, since the Euro represents 57% of the U.S. Dollar Index, traders should keep an eye on it this week, especially on Thursday when the ECB makes its policy decision on tapering.

A stronger Euro could drive gold prices higher because it will drive the U.S. Dollar Index lower. Therefore, the next rally or break in gold may have nothing to do with whether the Fed tapers or not, but rather what the ECB does.