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James Hyerczyk
Comex Gold

Gold futures plunged last week as the precious metal touch an eight-month low. The selling was likely fueled by a steep rise in U.S. Treasury yields and a relatively firm dollar. The catalysts behind the pressure were optimism over a larger economic stimulus package and the somewhat successful COVID-19 vaccination drive.

Last week, April Comex gold futures settled at $1777.40, down $45.80 or -2.51%.

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Despite the weakness, the selling pressure began to subside a little as the market once again tested a major 50% to 61.8% retracement zone at $1787.30 to $1711.70.  To longer-term investors, this zone represents value so we could see a short-term support base form over the near-term.

The problem with the market is the short-term outlook. Although most traders believe that government fiscal aid is forthcoming, they aren’t sure of the timing of the move or the size of the coronavirus relief package. President Joe Biden is hoping for $1.9 trillion in additional fiscal aid, but it looks as if he is going to have to settle for something less.

If you mentioned the term fiscal stimulus at this time last year, gold would’ve gone through the roof. We’ll actually it did. At that time, the move was accompanied by a plunge in U.S. Treasury yields that helped boost demand for gold. Uncertainty over the containment of the novel coronavirus was the catalyst behind the rally in gold.

This year, conditions are different. Global interest rates are rising as the outlook for the economy continues to improve with the successful launch of coronavirus vaccines. Instead of traders wondering if the major central banks would implement a negative interest rate strategy, they now see the possibility of an exit from this extremely low interest rate environment although the central bank leaders have been saying rates will remain low for some time into the future.

This Week’s Focus

Technically, gold has reached a potential support area so we wouldn’t be surprised by a short-covering rally. However, the main focus will be on the testimony from Federal Reserve Chairman Jerome Powell on Tuesday and Wednesday.

Powell is likely to reiterate that the Fed would maintain an easy monetary policy stance in order to support the economy as it emerges from the COVID-19 pandemic. That news could be long-term supportive.

What gold traders want to know is how he feels about rising global bond rates and the possibility of a spike in inflation. Usually, talk of inflation is bullish for gold, but when it also causes bond yields to spike higher, then gold prices get muted.

Bullish gold traders will be hoping that Powell downplays the rise in inflation, while warning that a jump in interest rates could stunt the economic recovery. Powell is also likely to endorse the need for additional fiscal stimulus that could underpin gold prices.

The real question for gold traders is whether we’ve seen the bottom in interest rates or if there will be one more push lower. It’s hard to imagine that rates will test their lowest levels again now that progress has been made with the rollout of the vaccines. So while we’re open to a short-covering rally in gold, we don’t expect a prolonged move higher like the industrial metals – silver, platinum and copper.

For a look at all of today’s economic events, check out our economic calendar.

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