Price of Gold Fundamental Weekly Forecast – Will Renewed Trade Talks Dampen Any Need for July Rate Cut?

Gold futures finished higher for the week, but well off its multi-year high as investors reduced the chances of a 50 basis point interest rate cut by the Federal Reserve in late July after two central bank officials failed to confirm the need for an aggressive cut. The news drove Treasury yields higher, making the U.S. Dollar a more attractive asset and reducing demand for dollar-denominated gold.

Last week, August Comex gold settled at $1413.70, up $13.60 or +0.97%.

Given the outcome of the events over the weekend at the G-20 summit in Osaka, Japan, it looks as if gold investors will have some serious decisions to make especially if Treasury yields spike higher on the news.

Last Week’s Key Event

The key event that most attribute to the sharp reversal to the downside in gold last week were comments from Federal Reserve Chairman Jerome Powell and St. Louis Federal Reserve President James Bullard on June 25, which dampened hopes by some investors that Fed policymakers would deliver a half-point interest rate cut in July.

Powell held close to his comments from the previous week after the Fed’s June interest rate decision and release of its monetary policy statement, saying that while there is greater uncertainty about trade and worries about the global economy, policymakers don’t know how long this may last or how serious the drag might be. Traders read this to mean that Powell was not endorsing the 50 basis point rate cut that the markets had been pricing in.

“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Powell said in brief remarks ahead of a moderated discussion at the Council on Foreign Relations in New York.

Bullard, who was the lone dissenter from the Fed decision to hold rates steady at its June meeting, reiterated that he thought a quarter-point rate cut would be a wise “insurance” move. However, he also didn’t endorse a half-point rate cut.

“I think 50 basis points would be overdone,” Bullard said on Bloomberg Television.

The comments encouraged 10-year Treasury note investors to book profits after a spectacular rally. Since note prices run inverse to yields, the action drove Treasury yields higher, dragging up the U.S. Dollar and pushing down gold prices.

Weekly Forecast

In a move that should have a major impact on the financial markets on Monday, U.S. President Donald Trump and Chinese President Xi Jinping agreed on Saturday at their meeting at the G-20 summit in Osaka, Japan, to proceed with trade negotiations.

For nearly two months, a series of escalations to the on-going trade spat between the United States and China had held the financial markets hostage, nearly forcing a change in U.S. monetary policy, while threatening to drive the global economy into recession.

After meeting for about 80 minutes, the two leaders emerged with the news that trade negotiations were back on. Furthermore, it looks like Trump offered a few concessions to get the deal-making process moving forward.

Chinese state-run press agency Xinhua described the meeting result as the presidents agreeing “to restart trade consultations between their countries on the basis of equality and mutual respect.”

Trump said afterwards that the meeting had gone as well as it could have, and that negotiations with China would continue. “We are right back on track,” the president said.

Impact on Gold Prices

If investors read this news as bullish for the economy, or that it could encourage the Fed to pass on a rate cut in late July then gold prices are likely to drop sharply.

I don’t see how Treasury investors can’t start pricing in the possibility of a trade deal over the near future so I’m leaning to the downside for gold.

What we really have are two situations. There are some that believe the economy is damaged and the Fed needs to cut as “insurance” against further weakness, and those who believe policymakers will continue to take a “wait and see” attitude.

Given that one outcome is potentially bullish and the other potentially bearish, we could see extreme volatility this week especially with the U.S. bank holiday on Thursday, sandwiched between a pair of PMI reports and the U.S. Non-Farm Payrolls data on Friday.

Watch the Treasury yields for clues.