Price of Gold Fundamental Weekly Forecast – Price Action Driven by Uncertainty Over Future Fed Rate Cut

Unless Treasury yields plunge as well as the U.S. Dollar, gold’s upside is likely to be limited. There is room to rally due to short covering and position-squaring, but with the Fed set on hold rates steady at this time and other central banks like the Reserve Bank of Australia and the Reserve Bank of New Zealand ready to cut rates, demand for gold is likely to be subdued.
James Hyerczyk
Gold and US Dollar

Gold futures finished the week lower but managed to retake some of the week’s earlier losses with a strong performance on Friday. Short-term, the factors influencing prices were primarily U.S. Treasury yields and the U.S. Dollar. Demand for higher yielding stocks indexes had little effect on prices. Longer-term traders were influenced by whether the Fed would lower rates later in the year.

Last week, June Comex gold futures settled at $1281.30, down $7.50 or -0.58%. Early in the week, the market touched a nearly five-month low at $1267.30.

Fed Pushes Prices Lower

Gold fell after the U.S. Federal Reserve interest rate and monetary policy decision on May 1. Many gold traders went into Fed Day positioned for the Federal Open Market Committee to be a little bit more dovish than it actually was. Central bank policy makers voted to leave its benchmark interest rate and monetary policy unchanged. Furthermore, Fed members dimmed any hopes for a rate cut in the near-term, driving up Treasury yields and the U.S. Dollar. This dampened demand for dollar-denominated gold.

What really surprised traders was that the Fed indicated that it saw no compelling reason to consider a rate cut any time soon, citing rising employment and economic growth.

Federal Reserve Chairman Jerome Powell’s post-meeting comments on May 1 showed he viewed the tepid inflationary readings as transitory factors. This led traders to trim bets that the Fed would cut rates this year and stimulate inflation, which ended up driving down demand for gold.

“Inflation month-to-month, quarter-to-quarter will always be moving around, there will always be factors hitting it,” Powell told reporters in a press conference. “So probably the biggest single factor driving it is the rate of underlying inflation, or closer related, the idea of where inflation expectations are anchored.”

After the Fed announcements, the implied odds of a 2019 rate cut by some measures fell from 75 percent to 50 percent.

Gold Investors Readjust Positions after Mixed U.S. Economic Data

After liquidating positions on Wednesday and Thursday, gold buyers returned to the market on Friday following reports of mixed-to-weaker-than-expected U.S. economic data. Both speculative buying and short-covering helped boost gold prices to end the week after the U.S. Dollar slipped against a basket of currencies as traders focused on the weaker aspects in the April U.S. payrolls report and a report on non-manufacturing PMI came in below expectations.

In the U.S. non-farm payrolls report, the headline number came in below expectations and the jobless rate fell to its lowest level in more than 49 years. However, the modest 0.2% monthly pace of wage growth and the drop in the job participation rate prompted some investors to sell the greenback, driving up demand for dollar-denominated gold.

Later in the session, gold received additional support when a measure of U.S. services activity from the Institute for Supply Management posted a surprise drop to a 20-month low in April.

Weekly Forecast

This week’s key events likely to have a direct effect on the direction of U.S. Treasury yields, the U.S. Dollar and consequently gold prices are a speech by Fed Chair Powell on Thursday as well as a report on producer inflation. On Friday, investors will get the opportunity to react to the latest data on consumer inflation.

Unless Treasury yields plunge as well as the U.S. Dollar, gold’s upside is likely to be limited. There is room to rally due to short covering and position-squaring, but with the Fed set on hold rates steady at this time and other central banks like the Reserve Bank of Australia and the Reserve Bank of New Zealand ready to cut rates, demand for gold is likely to be subdued. Furthermore, persistent stock market strength indicates there is demand for higher risk assets even at all-time highs.

In order to rally a spark a rally in gold, I think all three key influences are going to have to play a part. This means gold bulls will need to see a drop in Treasury yields, a plunge in the U.S. Dollar and a decent sell-off in the stock market. Otherwise, we’re likely to continue to see two-sided trading with a bias to the downside in gold. Periodic short-covering rallies will likely be fueled by position-squaring rather than aggressive speculative buying.

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