Price of Gold Fundamental Weekly Forecast – Tapering, Higher Rates are Coming; Don’t Fight the Federal Reserve

Gold futures put in a mixed performance before closing slightly higher for the week. The price action was driven by a choppy trade in the U.S. Dollar, but gains were likely limited by a rise in U.S. Treasury yields. Gold was also support at times by lower demand for riskier assets.

Last week, December Comex gold futures settled at $1751.70, up $0.30 or +0.02%.

The reasons for the mostly sideways trade were confusing at times for short-term traders so we really didn’t take away much from the price action. The mid-to-longer-term looks bearish because the Fed signaled it was moving closer to tightening policy. This would take U.S. Dollars out of the market and pressure gold.

The dollar didn’t offer much guidance for gold traders last week. One day it was rallying because of safe-haven demand tied to stock market volatility. Another day it was falling because of easing tensions in the stock market. Overall, however, the dollar was supported by higher yields.

The race is on to see which central banks move aggressively toward removing stimulus from their respective economies. Some are raising rates or planning to raise rates, other are trimming stimulus or tapering bond purchases. The U.S. Dollar is in this mix and that doesn’t bode well for gold prices.

Gold prices may firm if the stock market continues to rally sharply, but that’s only because investors move into the safety of U.S. Treasurys. When they do that, yields fall and gold gets an artificial boost. Investors also move money into the U.S. Dollar, when weighs on gold prices.

I don’t think that even a stock market crash could turn gold into a mid-to-long term bull market. In order for that to happen, the Federal Reserve and other central banks would have to pump additional stimulus into the financial markets. That isn’t likely to happen, however, because most are trying to reduce stimulus. If they did an about face then they risk losing the market’s economy.

What this means is that the process of a global tightening of monetary policy is starting and gold prices will have limited upside potential.

Weekly Forecast

Last week, the Federal Reserve announced that it would likely begin tapering before the end of the year. That’s the first step in tightening monetary policy. Real rates are likely to be pushed up by that news. The second step in the process is the first rate hike, which Fed policymakers said could occur as soon as 2022.

Cleveland Fed President Loretta Mester said on Friday the central bank should start reducing its support for the economy in November and could start raising interest rates by the end of next year should labor markets continue to improve.

What this means is to sell rallies in gold especially even if the China Evergrande debt problems trigger a spike higher.