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James Hyerczyk
Comex Gold

The weakness in gold prices was fueled by two factors last week. Early in the week, gold was pressured by spillover selling in response to the previous Friday’s robust U.S. Non-Farm Payrolls report and ISM Manufacturing PMI data. These reports raised issues about the Fed’s assessment of the economy. Treasury yields rose on the news as traders priced in the possibility of at least one rate hike in 2019. This made the U.S. Dollar stronger, while driving down demand for dollar-denominated gold.

Last week, April Comex gold settled at $1318.50, down $3.60 or -0.27%.

Gold was further pressured as the dollar rose further on safe-haven buying tied to the problems with U.S.-China trade negotiations. Safe-haven buyers returned to gold late in the week, helping to put in the low for the week as investors reduced demand for risky assets.

Mixed Fundamentals

Gold started its recent $50 price surge on January 24 as the dollar slid ahead of a U.S. Federal Reserve meeting where the central bank was widely expected to leave interest rates unchanged. Gold hit a multi-month top on January 31, one day after the Fed made dovish remarks signaling a pause in further rate hikes, and one day before the release of stronger than expected non-farm payrolls and factory output data.

The Fed news helped drive the U.S. Dollar lower, making dollar-denominated gold a more attractive asset, however, the economic data changed investor sentiment about future Fed policy. Treasury yields rose as investors reduced the odds of a rate cut in 2020 and may have started to price in at least one rate hike in 2019. This news drove the U.S. Dollar higher, encouraging gold investors to take profits and reduce positions.

Gold prices fell further last week as currencies weakened, especially the Euro as the outlook for the global economy, particularly the Euro Zone, was downgraded. Gold prices further weakened on renewed concerns over U.S.-China trade relations, but reached its low for the week when stock market volatility rose.


Weekly Forecast

Last week’s price action suggests that gold will weaken if the U.S. Dollar continues to rise. However, these gains will be limited if U.S. Treasury yields weaken. Gold prices are likely to rally if the selling pressure in the stock market leads to increased volatility. In this case, the shedding of higher risk assets will drive investors to seek shelter in gold as a safe-haven asset.

The fundamentals could get confusing at times because we can foresee instances where both gold and the U.S. Dollar rise at the same time. However, we are pretty confident that a weaker U.S. Dollar will lead to higher gold prices.

We’re going through a transition period as investor appetite for risk wanes because of uncertainty over U.S.-China trade relations. While this is taking place, the normal correlation between gold and the U.S. Dollar may be skewed over the short-run.

Please let us know what you think in the comments below. 

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