Price of Gold Fundamental Weekly Forecast – Likely to be Supported as Long as Yields Remain Stable

Gold futures hit a five-month high last week as the U.S. Dollar and Treasury yields slipped amid expectations that the U.S. Federal Reserve will keep its monetary policy accommodative. Some gold bulls followed the dovish chatter from Fed officials last week, others placed their bets on torrid inflation continuing beyond the central bank’s “transitory” period.

Last week, August Comex gold settled at $1905.30, up $26.40 or +1.41%.

Helping to make gold more attractive was a drop in the U.S. Dollar against a basket of major currencies into nearly a 4-1/2 month low, while U.S. yields touched a two-week low. Both moves drove up foreign demand for dollar-denominated bullion.

At times, last week’s price action suggested that gold investors were betting that inflation is more deeply embedded into the economy than what the Fed is currently expecting. But that’s not what the Fed speakers were telling us. Furthermore, the stock market wasn’t telling us that either. Medium-to-longer-term inflation? That is the question.

Among the numerous dovish Fed speakers last week, San Francisco Federal Reserve President Mary Daly said Federal Reserve policymakers are “talking about talking about” reducing their support for the economy, but for now policy is in a ‘very good place”. She further added, “We haven’t seen substantial further progress just yet” and “It’s too early to say the job is done.”

Other Fed officials helped support gold prices by tamping down concerns about runaway inflation and keeping bond yields in check.

Fed vice chair for supervision Randal Quarles signaled the U.S. central bank’s plans to open talks on easing its bond buying program as the economy roars ahead and prices rise. Last Tuesday, vice chair Richard Clarida said the Fed could curb inflation and engineer a “soft landing” without throwing the economic recovery off track.

Even earlier in the week, Fed Board Governor Lael Brainard and James Bullard, president of the St. Louis Fed, reiterated the dovish monetary policy stance.

The week ended with a report showing the core PCE price index vaulted 3.1% on Friday, the largest annual gain since July 1992, due to a recovery from the pandemic and various supply disruptions.

Weekly Outlook

At this time, gold is in a good position to rally further, but I don’t believe that it is fear of stubborn inflation driving the price action. I believe it’s the prospect of an extended period of historically low interest rates that is driving prices higher.

If inflation gets out of control, contrary to what the Fed is saying, central bank policymakers could act more quickly than currently expected to calm the overheating economy. This wouldn’t be especially bullish for gold.

The rise in the stock market indicates to me that investors are betting on a prolonged period of lower interest rates. If they feared inflation then stocks would be moving lower. Furthermore, traders could be buying gold as a potential hedge against a stock market crash.

Whatever the reason, it looks like gold will be supported as long as interest rates remain stable.