Price of Gold Fundamental Weekly Forecast -Wildcards are Government Shutdown, Trade Deal

Gold futures posted a choppy, two-sided trade last week before finishing slightly higher. The market also traded inside the previous week’s range while wrapping up its fourth successive week of gains. This type of price action suggests investor indecision and impending volatility. The market continued to be underpinned by the thought that the U.S. Federal Reserve might slow down or halt its monetary policy tightening cycle. However, increased demand for risky assets continue to keep a lid on prices.

For the week, February Comex gold futures settled at $1289.50, up $3.70 or +0.29%.

Essentially, the direction of the gold market was determined by the price action in the U.S. Dollar. Since gold is a dollar-denominated market, it tends to weaken when the greenback strengthens and when the dollar weakens gold moves higher. We saw a lot of this price action a lot last week and this relationship is likely to continue this week.

The U.S. Dollar was pressured by the December Fed meeting minutes and comments from Fed Chair Jerome Powell that suggested the Fed might adopt a dovish stance on future rate hikes. Powell also said the U.S. central bank could be patient on rate policy, while other Fed policymakers noted “muted” inflation.

The Fed’s noting of “muted” inflation was reaffirmed on Friday when a government report showed U.S. consumer prices fell for the first time in nine months in December. This was blamed on weaker energy prices.

Gains were likely limited as demand for stocks increased following the end of the first round of successful mid-level talks between the United States and China. By the end of the week, the two economic powerhouses had scheduled higher-level talks in Washington before the end of the month.

Forecast

The price action this week will continue to be driven by the direction of the U.S. Dollar. The greenback will largely be influenced by the direction of U.S. Treasury yields and yields will be moved by appetite for risk and a number of economic reports, Fed speakers and the government shutdown.

I think the government shutdown has reached a point where it will actually become a factor in the markets. If risk is off, look for gold to firm, if risk is on then gold will likely move sideways-to-lower.

The major report is Producer Price Index. The minor reports are Philadelphia Fed Manufacturing Index and Preliminary University of Michigan Sentiment.

Several FOMC Members will also be speaking. So far most have been in favor of the Fed talking a break from rate hikes. This is potentially supportive for gold.

I think the wildcards this week are the trade deal and the government shutdown. I think everyone knows what the Fed is thinking so comments from Fed members will have a diminishing impact on gold prices.