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Price of Gold Fundamental Weekly Forecast – Likely to Weaken if Fed is Dovish on Future Rate Cuts

James Hyerczyk

Gold futures finished lower for a third week as rapidly rising U.S. Treasury yields and higher equity markets continued to reduce gold’s appeal as a safe-haven asset. Optimism over improving trade relations between the United States and China after the two economic powerhouses made conciliatory gestures ahead of the resumption of trade talks in early October was one of the catalysts behind the drop in gold prices.

Last week, December Comex gold settled at $1499.50, down $16.00 or -1.06%.

Other catalysts behind the weakness last week were improving U.S. economic data, which dampened the risk of recession in the world’s largest economy and aggressive stimulus from the European Central Bank (ECB) that suggested policymakers may be out of weapons to turn the Euro Zone economy around.

Rising Treasury Yields Reducing Demand for Gold

Throughout the summer, gold was driven higher by plunging Treasury yields as speculators increased bets on a U.S. recession due to escalating trade tensions between the United States and China. The selling was strong enough to invert the yields of the 2-year and 10-year Treasury notes, a sign used by many to forecast a future recession.

An easing of tensions between the U.S. and China following the announcement of renewed trade talks has caused investors to rethink the risk of recession. This has encouraged long bond investors to book profits, driving interest rates higher in the process. Additionally, stock market investors, betting on a stronger economy, also began reducing their safe-haven gold purchases.

US-China Tensions Ease

Last week, Washington and Beijing toned down signs of any previous escalation in their dispute with reconciliatory gestures from both nations that boosted risk appetite in the markets, while reducing gold’s appeal as a safe-haven asset.

President Trump said he was delaying plans to impose an additional 5 percent duty on $250 billion worth of Chinese goods until October 15, or two weeks later than now scheduled. China renewed its purchases of American farm goods, with Trump saying it was expected Beijing would purchase “large amounts” of agricultural products. The President also said Thursday that he would consider a temporary trade deal with the Chinese though he’d prefer to hash out a permanent accord.

European Central Bank Makes Aggressive Moves

The ECB cut its deposit interest rate by 10-basis points to a record low of minus 0.5% and said it would restart bond purchases at a rate of 20 billion Euros a month from November 1 for an indefinite time.

German government bond yields surged on the back of investors thinking the European Central Bank was done stimulating the ailing Euro Zone economy after cutting rates on Thursday.

The Euro surged on the moves, driving the U.S. Dollar Index lower. However, the weaker dollar was not supportive for dollar-denominated gold. The rising German bond yields helped keep a lid on gold prices, offsetting the weakness in the U.S. Dollar.

U.S. Economic Data Improves

Last week, the U.S. Labor Department reported its consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.

This was bearish for gold because it meant that consumer prices were still strengthening despite a July rate cut by the Federal Reserve.

Additionally, U.S. retail sales increased more than expected in August, pointing to solid consumer spending that should continue to support a moderate pace of economic growth.

Weekly Forecast

Gold could go up early in the week because some speculators will buy the precious metal because of the attack on Saudi Arabian oil facilities over the weekend. They call this “safe-haven” buying. But as you know, I don’t because the gold market is controlled by the direction of Treasury yields and demand for risky assets.

If yields plunge as well as the stock market then a rally in gold could be supported over the short-run, however, unless the situation in the Middle East escalates into a war, gold’s gains are likely to be limited.

Gold traders will also be watching Wednesday’s Fed interest rate and monetary policy decisions. A 25-basis point rate cut is widely expected, however, traders will be more interested in how Fed policymakers feel about a December rate cut.

If the chances of a December rate cut fall after the Fed announcements then gold could see further downside pressure.

This article was originally posted on FX Empire