Gold Price Fundamental Daily Forecast – Rising Yields, Strong Dollar Help Sustain ‘Sell the Rally’ Mode

Gold futures are lower on Wednesday but off its intraday low, following a steep sell-off the previous session. That move was fueled by a surge in U.S. Treasury yields and a strong recovery in the U.S. Dollar after a government report showed consumer inflation was still running hot.

The move forced holders of gold to adjust their positions in anticipation of a strong response from the Federal Reserve at next week’s policy meeting and its meeting in early November.

At 09:23 GMT, December Comex gold futures are trading $1713.10, down $4.30 or -0.25%. This is up from an intraday low at $1706.50. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $158.55, down $2.08 or -1.29%.

Textbook Reaction to Higher-than-Forecast Consumer Inflation

Tuesday’s inflation data may have surprised, but the reaction by gold traders was by the book.

The Labor Department reported U.S. consumer prices unexpectedly rose in August and underlying inflation accelerated amid rising costs for rents and healthcare, giving the Fed ammunition to deliver a third 75 basis points interest rate hike next Wednesday.

Although gold is viewed as a hedge against inflation, higher interest rates increase the opportunity cost of holding the bullion while boosting demand for the U.S. Dollar, which in turn hurts demand for dollar-denominated gold.

Higher Yields, Stronger Dollar Could Cap Gains on Wednesday

U.S. Treasury yields continue to edge higher on Wednesday as investors digested the previous session’s dramatic market route triggered by the hot inflation reading.

The yield on the 2-year Treasury, the part of the curve most sensitive to Fed policy, was trading at around 09:23 GMT at 3.78%, at one point hitting as high as 3.805%, its highest level since November 2007.

Meanwhile, the yield on the benchmark 10-year Treasury note was up just over one basis point, trading at 3.439%. The yield on the 30-year Treasury bond was up just over half a basis point at 3.517%.

Some traders are now expecting a full point rate hike from the U.S. Federal Reserve at its September 20-21 meeting, according to the CME FedWatch tracker of Fed funds futures bets. Economists at Nomura now also expect to see a full percentage hike.

Short-Term Outlook

We expect rising yields and a stronger U.S. Dollar to continue to cap gains and keep traders in the “sell the rally” mode.

The big question is whether buyers will continue to support the December Comex gold futures contract at the March 30, 2021 bottom at $1696.10. This is important because the next major support doesn’t come into the picture until $1618.00. This is the April 1, 2020 bottom also known as the “Pandemic Low”.