Price of Gold Fundamental Weekly Forecast – Falling Yields, Weaker Dollar Underpinning Gold Prices

Gold futures closed higher last week, supported by a weaker U.S. Dollar and a decline in U.S. Treasury Yields. Falling yields helped make the U.S. Dollar a less-desirable asset, increasing demand for dollar-denominated gold. Talk of a possible recession also drove investors into gold because if this were to occur, the Fed would have to put the brakes on its plan to raise rates two more times in 2018 and as many as three times in 2019.

August Comex Gold futures settled at $1255.80, up $1.30 or +0.10%.

Yields fell partly in response to the mixed U.S. Non-Farm Payrolls report which showed a better-than-expected headline number, but an unexpected rise in the unemployment rate and weaker-than-expected average hourly earnings.

As a result of the jobs report, expectations of a fourth U.S. Federal Reserve rate hike later this year declined. According to the Fed Funds Indicator, investors priced in a 77 percent chance of a September rate hike, down from 80 percent before the jobs data.

So while a September rate hike is still a likely event, traders feel that without an acceleration of wage growth, a fourth hike at the end of the year is a more difficult call and the futures market shows that traders are putting the odds of a December rate hike at about 50 percent.

In other news, the minutes from the Federal Open Market Committee’s June Meeting reflected confidence among the Federal Reserve’s policymakers in the strength of the U.S. economy and its plans for future interest rate hikes.

For the most part, the minutes were bearish for gold. Talk of additional rate hikes beyond neutrality to prevent the economy from overheating may have helped limit gains somewhat.

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Forecast

Last week’s performance in the wake of a strong rally in U.S. equity markets suggests short-sellers were booking profits. It may also be an indication that gold investors were closely monitoring the movement in U.S. Treasury yields, which ultimately control the direction of the U.S. Dollar.

The benchmark U.S. Treasury yield settled at 2.82% last week, down 0.4%. For the year, yields are up 0.42%. The price action in the Treasury markets indicates investors are being cautious and taking some protection against a possible economic downturn.

Last week, the yield curve, a set of interest rates watched closely by bond market professionals, has gotten to its flattest level since before the financial crisis. The spread between 2-year note yields and 10-year yields is around 30 basis points, down from about 90 basis points one year ago.

Here is the takeaway, keep an eye on the yield curve. The fear is that the flattening yield curve could invert, meaning that short-term rates would exceed longer-term yields. This action is typically viewed as a recession signal.

A recession signal itself may not be enough to derail the Fed’s plans to raise interest rates two more times this year, but it could mean they cut back to just one. This would likely lead to an extension of the rally in gold.