Price of Gold Fundamental Weekly Forecast – Direction Dictated by Dollar, Stock Market Volatility

Gold prices surged last week, essentially driven higher by a sell-off in the U.S. Dollar. The dollar retreated in response to a less-hawkish U.S. Federal Reserve Monetary Policy Statement and fears of a trade war between the U.S. and China.

Additionally, a steep sell-off in the stock market drove investors into safe haven assets like Treasurys. Yields fell on the move, helping to weaken the U.S. Dollar while making gold a more attractive asset. This helped push gold up to a one-month high.

June Comex Gold settled the week at $1355.70, up $37.70 or +2.86%.

To recap the key events that drove gold higher last week:

On March 21, the U.S. Federal Reserve raised rates for the sixth time since the policymaking Federal Open Market Committee (FOMC) began hiking rates off near-zero in December 2015. The widely expected move put the benchmark funds rate at a target of 1.5 percent to 1.75 percent.

The Fed also upgraded its economic forecast, and dropped hints that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years. The fact that traders were pricing in a 38-percent chance of four rates hikes probably led to dollar weakness.

Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.

Inflation expectations changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation.

Additionally, President Donald Trump signed an executive memorandum on March 22 that would impose retaliatory tariffs on up to $60 billion in Chinese imports.

The new measures are designed to penalize China for trade practices that the Trump Administration says involve stealing American companies’ intellectual property.

The dollar weakened and gold strengthened on the fear that China is likely to retaliate against the tariffs by targeting U.S. agricultural products that are reliant on the Chinese export market.

Forecast

With risk aversion the name of the game, gold has once again become a popular safe haven asset.

The direction of the gold market this week is likely to be determined by the movement in the U.S. Dollar and the stock market.

The most bullish scenario for gold will be a weaker dollar and another steep break in the stock market.

Overbought conditions may lead to profit-taking after last week’s price surge, but this shouldn’t be enough to change the trend back to down. Retaliation from China is also likely to offset any weakness.

As far as economic data is concerned, investors will get the opportunity to react to Final GDP and Conference Board Consumer Confidence. Both reports are not likely to have a major influence on the price action.