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James Hyerczyk
Comex Gold and U.S. Dollar

Last week’s price action in gold proved once again it’s not safe-haven buying that drives gold prices, but the direction of U.S. interest rates and the U.S. Dollar. Last week, both were in play when the Federal Reserve strongly suggested a rate cut was coming later this year, and traders vehemently indicated the first rate cut is coming in late July.

The Fed didn’t explicitly say a rate cut was coming. It never gave a time frame. But it sure left enough hints in its monetary policy statement, “dot plot” charts and Fed Chairman Powell’s press conference that it was preparing investors and consumers for its first rate cut since 2012.

Last week, August Comex gold settled at $1400.10, up $55.60 or +4.14%.

As far as the highlights of the Fed’s interest rate decision, monetary policy statement and economic projections are concerned:  The Federal Open Market Committee (FOMC) voted 9 to 1 to keep the benchmark rate in a target range of 2.25% to 2.50%. The Fed dropped the word “patient” in describing its approach to policy. Central bankers also left the door open somewhat to future cuts. Finally, eight members favored one cut in 2019, while the same number voted in favor of the status quo, while one wanted a rate hike. Powell did say during a post-meeting press conference that some officials believe the case for accommodation had “strengthened.”

The Fed comments exerted some pressure on the U.S. Dollar, which drove up demand for dollar-denominated gold, but it was a plunge in Treasury yields that made the dollar as less-desirable investment.

U.S. government debt yields posted huge losses last week after many investors took the Federal Reserve policy announcement as a sign the central bank could cut rates in the coming months.

The yield on the benchmark 10-year Treasury note posted a 4-basis point decline for the week as it straddled 2.06% at the end of the week after falling below 2% for the first time since 2016 shortly after the Fed announcements.

Weekly Forecast

Gold traders are going to continue to take their cues from the direction of Treasury yields and the U.S. Dollar. The best chance for another spike to the upside will be on Tuesday when Federal Reserve Chairman Jerome Powell speaks. Gold prices could rise sharply if he continues to suggest a rate cut is coming. If he is less-dovish than he seemed in his post-meeting press conference last Wednesday then traders may decide to take profits in gold.

Chasing the market higher, or waiting for a pullback into support are the key issues facing traders. Since the Fed didn’t actually say a rate cut was coming in July, doubt could begin to creep into the market, which may encourage some profit-taking. This will be especially true if Powell is less-dovish in his speech and this week’s consumer confidence, durable goods and Final GDP figures come in better-than-expected.

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