Price of Gold Fundamental Weekly Forecast – Weaker Jobs Data, Inflation Will Eventually Feed the Bull

The longer-term picture is clear to me and to bullish gold traders. The Fed needs to turn dovish and signal a rate cut in order to generate a strong rally. However, policymakers aren’t likely to make a move unless they see a weakening in the labor market and further weakness in inflation.
James Hyerczyk
Comex Gold

Gold closed higher last week as aggressive buyers may have found value inside a longer-term retracement zone at $1280.80 to $1261.70. Furthermore, buyers came in at $1274.60 as they sought to defend the previous main bottom at $1273.20. It wasn’t much of a reaction from a historical standpoint, but it was enough to produce a small gain for the week.

Last week, August Comex gold settled at $1289.20, up $7.80 or +0.61%.

The higher close in gold came about as Treasury yields fell to a multi-month low, the U.S. Dollar closed lower after hitting a multi-year high and the Dow settled lower for the fifth straight week.

Gold was set to close lower for the week until the U.S. Flash Manufacturing PMI report for May came in lower than expected. The report was the latest sign that the trade war may be slowing the economy.

Gold traders may have started betting that a slowdown in the U.S. economy will lead to a Fed rate cut. The dollar will weaken further if rates are cut. This should make gold a more desirable asset.

Last Week’s Price Action Catalysts

The Fed minutes offered nothing new for gold traders. The minutes essentially reiterated the Fed’s “patient” stance. Officials expect patience on rates to be appropriate for “some time.”

Treasury traders are pricing in a rate cut by the end of the year, however. Long-term government debt yields fell to near multiyear lows last week. Two of the yields inverted, which means investors are looking for a rate cut, but some are reading this as a recession indicator.

The biggest influence on the gold last week was mounting concerns that the trade war between the U.S. and China could persist longer and curb GDP growth more than first thought. The concern surfaced after the release of weaker-than-expected U.S. manufacturing and services PMI data.

Weekly Forecast

The longer-term picture is clear to me and to bullish gold traders. The Fed needs to turn dovish and signal a rate cut in order to generate a strong rally. However, policymakers aren’t likely to make a move unless they see a weakening in the labor market and further weakness in inflation.

This stance was confirmed last week by New York Fed President John Williams. He said that U.S. interest rates are in the right place given a strong economy and “essentially nonexistent” inflation pressures. He further emphasized that there is not currently a strong argument for changing rates, including as a response to low inflation readings that may be due to temporary factors.

“We need to make sure that we continue with a strong expansion, the strong economy, in a way that leads to inflation moving back to our symmetric 2% goal,” Williams said in response to a question on whether a rate cut could help support inflation.

“If that requires an adjustment of monetary policy down the road at some point then, based on all that analysis and evaluation, if that’s appropriate then I think we should do that. I don’t think we’re at that point today, and I don’t think we’ll be at that point in the very near future.”

So going forward, the price action and direction of gold is likely to be data-dependent. Weaker-than-expected U.S. economic data is likely to be supportive for gold prices, but the biggest rally will be fueled by a weakening labor market and lower inflation.

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