Price of Gold Fundamental Weekly Forecast – Will Emerging Market Stress Trigger Upside Breakout?

Gold futures settled higher last week as the asset showed signs of decoupling from its relationship with U.S. Treasury yields and the U.S. Dollar. Both assets finished higher last week, which typically pressures gold, however, last week’s price action suggests there was a buyer in the market.

While we’re not ready to slap the “bullish” tag on gold just yet, the signs are increasing that point toward a major bottom in August. We’ve seen evidence of a higher bottom on the chart, which tends to indicate buyers are coming in on the dips. Now all we need is for the buying to clear out the tops which currently sit at $1215.80, $1218.00 and $1220.70. If this occurs then we could see a drive into $1277.60 to $1303.70 over the near-term.

Last week, December Comex Gold settled at $1205.60, up $9.40 or +0.79%.

The catalyst that should drive gold prices higher is massive short-covering by the hedge funds and commodity money managers. They may have started covering last week, but we won’t know until we see the latest data from the Commodity Futures Trading Commission. Currently, CFTC data shows these professionals holding net short positions.

Last week, U.S. Treasury yields surged to multi-year highs on the back of strong U.S. economic data and hawkish commentary from U.S. Federal Reserve Chairman Jerome Powell. The Fed Chair even suggested the central bank could become more aggressive if need be in order to prevent inflation and the economy from overheating.

If this comment was made several months ago, gold probably would’ve plunged, but this late in the tightening cycle, gold traders are acting as if U.S. real yields are moving closer to topping out. Furthermore, it takes time to reverse a long-term downtrend, it doesn’t happen overnight.

First the short sellers have to be cleared out then the buyers have to come in with enough money to create a net long situation. When dealing with a number of expected future events, the process tends to last longer. This is the bottoming phase. It’s not like one event has to take place to turn gold bullish. The bottoming process is based on a series of events.

One of these events is a potential emerging market meltdown. With U.S. interest rates rising rapidly, investors are gobbling up the U.S. Dollar because it is a most attractive investment. However, when the dollar strengthens, the emerging market currencies weaken. Currently, there are major issues developing in Brazil, Venezuela, Argentina and Turkey. Who knows how long before problems begin to arise in India, China or Russia?

Gold buyers may be betting on an emerging market crisis. It certainly makes sense at this time, but it is still a speculative event. The Fed could control whether this move gains traction. If the Fed continues to press forward with aggressive rate hikes to combat inflation then we could see a huge correction on stocks or further weakness in the emerging markets (they are already in a bear market).

If the Fed is forced to alter its plans for aggressive rate hikes in order to prevent a stock market or emerging market meltdown then this should weaken the U.S. Dollar. And a weaker dollar should be supportive for gold prices.