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James Hyerczyk
Gold Bars and Dollar

Gold futures plunged to a two-week low last week just three sessions after touching a 1-month high with most of the price action controlled by a stronger U.S. Dollar. The dollar rose last week as a series of better-than-expected U.S. economic reports reduced the chances of a recession and the odds of a Fed rate cut later in the year.

Gold bulls were trapped at the highs after headline buyers tried to build a case for increasing geopolitical risk. Even a weekly decline in U.S. Treasury yields and slightly lower demand for risky assets failed to draw the attention of major gold buyers. Last week’s price action also suggests that gold has lost its luster as a safe-haven asset and is now an investment. This means it’s not likely to mount a serious rally as long as there are other assets that yield a better return on investment.

Last week, June Comex gold futures settled at $1275.70, down $11.70 or -0.91%.

Geopolitical tensions were present last week, but investors chose to use Treasurys as their safe-haven vehicle. Stocks finished lower, but well off their lows. This was enough to limit demand for safe-haven protection. The USD/JPY rose slightly, also an indication of an easing of U.S.-China trade tensions. Gold traders also showed little interest in the escalating tensions in the Middle East between the U.S. and Iran, and after Saudi Arabia reported drone attacks on its infrastructure.

Strengthening U.S. Economic Data Just Enough to Ease Recession and Rate Cut Fears

Positive reports from the U.S. and steady tone by most Fed speakers also weighed on gold prices. In the U.S. the key positive developments were a jump in the Empire State Manufacturing Index from 10.1 to 17.8, a surge in the Philly Fed Manufacturing Index from 8.5 to 16.6 and better-than-expected Housing Starts data. Weekly Unemployment Claims also showed a strengthening jobs market, coming in at 212K, lower than the 220K forecast.

The biggest drag on gold prices was the unexpected rise in consumer sentiment. According to the University of Michigan, consumer sentiment jumped to 102.4, soundly beating the 97.8 forecast.


Weekly Forecast

Last week’s price action strongly indicates the U.S. Dollar is the biggest influence on the direction of gold prices. Gold prices could continue to get crushed if demand for the greenback rises from a combination of safe-haven demand and a strengthening U.S. economy.

The price action also suggests that it is going to take a lot more than just geopolitical risk headlines to bring in the buyers. It may take an escalation of the trade dispute between the U.S. and China, and actual military action between the U.S. and Iran.

The major U.S. economic activity this week will include a speech by Fed Chair Jerome Powell on Monday evening, the FOMC Meeting Minutes on Wednesday afternoon and Friday’s Core Durable Goods Orders report.

Powell could move gold prices higher if his dovish comments drive the U.S. Dollar sharply lower. If he maintains his steady tone then gold could fall further if the greenback rises.

Wednesday’s Fed minutes are likely to be a market mover. Once again, gold will be a follower, not a leader. Gold traders are not likely to make a move until they see which way the dollar goes.

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