Price of Gold Fundamental Daily Forecast – Trying to Regroup After Fed Minutes Disappoint

Gold futures are trading lower on Thursday but still trading inside yesterday’s wide range. The cautious trade reflects uncertainty over the direction of short-term U.S. interest rates, the dollar and Fed policy.

After yesterday’s Fed minutes failed to deliver what bullish investors were looking for, they may have to wait until the next Federal Open Market Committee meeting on September 18 before getting another dose of bullish news.

At 10:02 GMT, December Comex gold is trading $1936.90, down $33.40 or -1.70%.

An old adage says “never bet against the Fed”, but it’s hard to place a bet if the Fed message isn’t clear. That’s what happened on Wednesday with the release of the Fed’s latest minutes from its July monetary policy meeting. The minutes weren’t clear about the Fed’s next move so investors reduced their long exposure, leading to a steep decline. There’s another old adage that says “when in doubt, get out” so I guess that was the theme of the day.

The Federal Reserve shook up the financial markets on Wednesday by not what they did, but what they didn’t do. The minutes from last month’s U.S. Federal Reserve meeting gave few clues about whether an even more dovish shift in its policy framework is possible in the fall.

The news came as a disappointment to some U.S. Dollar bears, setting off a chain-reaction in the financial markets, led by a spike to the upside by the greenback. The surge in the dollar drove gold prices sharply lower while encouraging investors to also dump the Euro and the high-flying Australian Dollar. Meanwhile, the less-dovish minutes drove investors to lighten up on their speculative long positions in U.S. stocks.

What Gold Traders Were Looking for From the Fed

Ahead of the release of the Fed minutes on Wednesday, speculative gold traders were betting on the Fed to say it would adopt an average inflation target, and seek to push inflation above 2% to make up for years it has run below, or a cap on government bond yields to ensure that interest rates stay low.

Allowing inflation to push above 2% will be bullish for gold because of the historical correlation between the two. Higher inflation weakens the dollar and a weak dollar makes gold a more attractive asset.

Capping bond yields will also be bullish for gold because it will help keep interest rates in the lower end of the range, which will also make non-yielding gold a more appealing asset.

Instead the Fed opted not to say it would implement either strategy, and that disappointed traders. Now gold investors will have to wait until the September 18 meeting to see if policymakers have changed their minds. This could lead to a sideways to lower trade until then.

Daily Forecast

We’ve been saying that Treasury yields and the dollar have been controlling gold prices over the near-term, but we could enter one of those periods when yields go down and the dollar goes up because of its safe-haven appeal. This would hardly be the bullish set up that gold investors desire.

Treasury yields are falling early Thursday in reaction to the Fed’s assessment of the economy. Meanwhile, the dollar is holding steady after hitting a more than 2-year low earlier in the week.

It’s just an assumption at this time, but if uncertainty over the country’s economic recovery causes rates to go down while increasing the appeal of the dollar as a safe-haven investment then gold could trade sideways to lower over the near-term.