Price of Gold Fundamental Weekly Forecast – If Treasury Yields Plunge then Look for Gold to Soar

Gold futures went on a roller-coaster ride last week, first rallying to a 10-month high before giving back most of those gains then rebounding late in the week to settle higher.

Early in the week, the market was driven higher by a weaker U.S. Dollar, which led to increased foreign demand for the dollar-denominated asset. Optimism around U.S.-China trade discussions dimmed the dollar’s appeal.

Gold prices peaked for the week after the U.S. Federal Reserve’s Monetary Policy Meeting Minutes were perceived as less-dovish. This helped drive up U.S. Treasury yields, helping to make gold a less-attractive investment. Higher rates reduce investor interest in non-yielding bullion. Gold was able to bounce back, however, on Friday to post its second weekly gain as disappointing U.S. economic data stoked worries about a global slowdown.

For the week, April Comex gold settled at $1332.80, up $10.70 or +0.81%.

Mixed U.S. economic data continued to be the source of confusion for gold traders. As with most economic reports, there is always a problem with assessing its future impact because data falls into three categories:  Leading, Lagging and Coincidental. Sometimes, traders get caught up in all three factors when they should be watching leading indicators to predict future issues with the economy.

Further complicating matters are U.S.-China trade relations and the impact of the government shutdown. If you believe the recent news, it seems that the U.S.-China trade dispute may be coming to an end. If this is the case then it seems logical that problems with Manufacturing in China and the U.S. should show signs of improvement later in the year. This raises the question, should gold traders really care about lower than expected Flash Manufacturing PMI like we saw last week?

Furthermore, because of the government shutdown in January, should we be worried about the accuracy of U.S. retail sales or durable goods data? Additionally, last week the Philly Fed Manufacturing Index posted a dismal -4.1, down from 17.0. Should we believe that the government shutdown had nothing to do with that? Should we be pricing in a huge rebound in next month’s numbers?

The point is I’m not sure gold traders are paying too much attention to each individual report, but rather selected reports that actually move U.S. Treasury yields and affect Fed policy.

Weekly Forecast

Last week’s price action suggests gold traders aren’t paying too much attention at this time to appetite for risk in the form of the stock market rally. It seems that the two have divorced themselves of a connection, at least temporarily, with gold traders primarily focusing on the direction of U.S. Treasury yields and the U.S. Dollar.

This is because gold doesn’t pay interest so it becomes a less-attractive asset when Treasury yields rise. If traders continue to believe the Fed is on course to raise rates at least once in 2019 then gold may have trouble rallying much above last week’s high at $1349.80. If this is the case then gold is more likely to pullback at least 50% of this year’s range into $1315.60.

If Treasury investors start to believe the U.S. economy is ready to turn south then this will take a Fed rate hike off the table. This will lead to lower rates and a weaker dollar. If this becomes the case then gold it likely to resume its uptrend.

So instead of trying to react to every economic report, just focus on Treasury yields. If yields rise then look for gold to retreat. If yields fall then look for gold to be underpinned. Furthermore, just watching and reacting to the dollar can get confusing at times because firstly, the dollar is index is manipulated by the Euro, and secondly, the dollar is not only being influenced by Treasury yields, but also safe haven demand at times.

Treasury yields are currently posting a chart pattern that suggests the return of heightened volatility. This translates into the same for gold. Look for a big move in gold this week. If yields plunge then gold should soar.