Price of Gold Fundamental Weekly Forecast – Fed News Bearish, but Vulnerable to Safe Haven Buying

Gold plunged last week as U.S. Treasury yields soared in reaction to a hawkish U.S. Federal Reserve meeting. The rise in yields helped make the U.S. Dollar a more attractive investment, reducing foreign demand for dollar-denominated gold.

There was some buying late in the week due to a geopolitical concern, but the primary catalyst for the selling pressure was the hawkish Fed.

December Comex Gold futures settled the week at $1297.50, down $27.70 or -2.09%.

The Fed drove U.S. Treasury yields to a more than two-month high after it said it would start reducing its $4.5 billion balance sheet starting in October. It also indicated the possibility of a third rate hike before the end of the year.

The announcement of the balance sheet trimming was the biggest news from Wednesday’s meeting. All nine members of the monetary policy committee voted for the action.

Current Fed policy requires the central bank to reinvest the proceeds from maturing bonds. On September 20, the Fed signaled it wants to wind down those reinvestments this year.

As far as reducing the balance sheet is concerned, Fed officials said that they will reduce it by $10 billion in Treasury and mortgage-backed securities a month, to start, by allowing bonds to mature without buying new ones.

The central bank also downplayed the impact of Hurricanes Harvey and Irma on the economy, saying that they “are unlikely to materially alter the course of the national economy over the medium term,” other than temporarily lifting inflation because of higher prices for gas and other goods for which the supply chain was disrupted.

Fed members also said that they now project faster growth for 2017, with a median forecast of 2.4 percent gross domestic product growth, versus a June projection of 2.2 percent.

Forecast

Late last week, gold prices found support after North Korea threatened to detonate a hydrogen bomb in the Pacific Ocean. Nothing happened over the week-end, but I still think this threat exists.

Traders are going to have to look at gold as bearish over the long-run if the Fed follows through with another rate hike in December. Currently, the odds of this taking place are about 70 percent. They are likely to continue to rise if economic growth – especially inflation and jobs – continue to improve.

Over the short-run, traders are going to have to be aware of geopolitical events especially escalating tensions between the U.S. and North Korea. If conditions continue to worsen, we could see a strong flight-to-safety rally in gold.

In the U.S. this week, the major reports include the Conference Board’s Consumer Confidence report, Durable Goods and Final GDP. Fed Chair Janet Yellen is also expected to give a speech on Tuesday at 1645 GMT.

With the Fed leaving open the possibility of a third rate hike in December, each U.S. economic report from now until the end of the year will take on greater importance so investors should watch for volatility with each release.