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Price of Gold Fundamental Weekly Forecast – Looking for More Downside Pressure as Yields Approach August Highs

Gold traders are going to continue to follow the movement in Treasury yields and the direction of the U.S. Dollar next week. Of particular interest will be the 10-year U.S. Treasury bonds reaction to the 2.06 percent yield. Taking out this level could trigger a steep break in gold.
James Hyerczyk
Comex Gold

Gold plunged last week, extending its losses to a three-month low as well as posting its biggest weekly decline in three years. Traders said that positive developments in the U.S.-China trade tarnished the precious metal’s safe-haven appeal, sending it to its biggest weekly loss since November 2016. Last week’s low of $1457.00 was also its lowest level since August 5.

Last week, December Comex gold settled at $1462.90, down $48.50 or -3.21%.

Essentially, investors who had been building bullish positions since August on the fear that the U.S.-China trade war would lead to a U.S. recession, liquidated in a major way last week.

However, there’s more to the selling pressure than just long liquidation due to improving U.S.-China trade relations.

In early August, U.S. Treasury yields inverted – a usually reliable signal of a future recession – and the major central banks presented dovish monetary policies, driving up demand for gold.

However, just two weeks ago the Fed made its third rate cut of the year then signaled it was pausing future rate cuts, bringing an end to its “mini-rate cut” cycle. The Bank of Japan, the European Central Bank and the Reserve Bank of Australia, all left their benchmark interest rates unchanged recently.

A slowdown and perhaps a shutdown of near-term rate cuts eliminated one of the main reasons for buying gold in the first place. This encouraged gold buyers to reduce their positions.

One of the biggest influences on gold prices last week was the rapid rise in U.S. Treasury yields. Aggressive bond sellers drove yields to their highest levels since early August. The higher yields helped make the U.S. Dollar a more attractive asset. At the same time, the rising greenback dampened demand for dollar-denominated gold.

Weekly Forecast

Gold traders are going to continue to follow the movement in Treasury yields and the direction of the U.S. Dollar next week. Of particular interest will be the 10-year U.S. Treasury bonds reaction to the 2.06 percent yield. This was its August 1 high. Taking out this level could trigger a steep break in gold. The daily chart indicates the market is vulnerable to another $50 dollar plunge.

Potential catalysts that could influence the price action are U.S.-China trade relations, reports on U.S. consumer inflation and retail sales, and two-days of testimony by Federal Reserve Governor Jerome Powell.

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