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James Hyerczyk

Gold finished higher last week after the cash market hit an 8-year high. A new contract high was hit in the futures market. Although the headline readers jumped on the multi-year high as a reason to be bullish, the price action didn’t carry much of an air of bullishness.

There wasn’t much of a follow-through to the upside after the new high for the year was hit, and the futures contract actually closed below its previous contract high set in April. This indicates to me that the market is in a long-term uptrend, but short-term demand is still mixed.

Last week, August Comex gold settled at $1790.00, up $9.70 or +0.54%.

Longer-term, the injection of massive amounts of fiscal and monetary stimulus from governments and central banks around the world, is enough to sustain the uptrend. Some may argue that most of this stimulus is already priced in, which explains why gold is having trouble breaking out of the range established in April.

Shorter-term, gains are being capped because economic reports are signaling a recovery in the global economy, therefore, dampening the need for additional stimulus. Short-term traders are getting burned buying strength or breakouts of new highs because there is no urgency to buy the precious metal. Furthermore, most of the investing capital is moving into higher-yielding stocks.

Weekly Forecast

While I still maintain an upside bias, at this time, I’m against buying strength and think the best opportunity in gold lies in buying the dips. The strategy is being driven by flat U.S. Treasury yields and strong demand for equities. We’re likely to continue to follow this approach as long as investors continue to shrug off the COVID-19 clouds that have dominated the headlines the past few weeks.

As long as Treasury yields are stable and stocks continue to rise, gold is going to have a hard time breaking out to the upside even if coronavirus infections continue to rise.

Gold is more likely to breakout to the upside if the economic data were suddenly to go into reverse.

The key report to watch this week is the U.S. Weekly Jobless Claims. It’s important because it’s more current than the monthly reports.

The June Non-Farm Payrolls report, which blew away the estimates, is old news. The Initial Claims reports tend to be more forward-looking. Gold is likely to start moving higher this week if supported by a surge in weekly unemployment claims. Furthermore, it is possible that the 11.1% unemployment reading in June is the lowest we see for several months.

Basically, in order to get gold moving to the upside in dramatic fashion, the rise in COVID-19 cases is going to have to derail the economic recovery. If it doesn’t then we’re probably looking at more sideways price action.

For a look at all of today’s economic events, check out our economic calendar.

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