Price of Gold Fundamental Weekly Forecast – Fed’s Assessment of Economy Will Set the Tone

Gold futures plunged last week, posting its third consecutive weekly decline as hopes for an economic recovery stoked a resurgence in demand for higher risk assets. Gold was essentially sold to raise the cash need to feed investor demand for higher-yielding assets.

Gold was propped up in March as investors parked money into the non-yielding asset while they figured out the likely worst case scenario for the economy, hurting from the effects of the coronavirus. Once equity investors determined their risks, they began buying stocks, dampening the need for gold as protection.

Last week, August Comex gold settled at $1683.00, down $68.70 or -3.92%.

Spot gold is about 3% below the seven-year high hit last month. Despite the short-term setback, gold remains well supported over the long-run due to a wave of central bank stimulus measures to combat a coronavirus-linked slowdown.

As the financial markets and economy move closer to some kind or normalcy, gold could start to lose some of its “safe-haven” shine and move closer to what it really is, an investment.

Gold is an investment that competes with other traditional investments like stocks, bonds, currencies and industrial commodities.

At times gold becomes the least favorable investment because it doesn’t pay you anything to hold it. Investors are always looking for yield and will place their money where they can get the best return for their money. At this time, gold doesn’t fit their description as a desirable asset. During these trying times, the short-run takes on added importance. Investors not only want a return, but they want it now. This is something that gold can’t deliver at this time.

Weekly Forecast

Since gold prices are being influenced by central bank activity, this week’s U.S. Federal Reserve interest rate and monetary policy decisions are likely to influence the direction of gold prices.

Gold investors have been reacting to the stock market rally. The rally in the stock market looks like investors are anticipating a V-Shaped recovery in the economy.

Since the stock market is forward-looking and most of the economic data we’ve seen so far has been back-dated or stale, many analysts have been confused by the strength of the stock market rally. Some say it is removed from reality.

The Fed may offer some insight into the real picture of the economy going forward with its projections. If the Fed comes across as dovish then this could give investors an excuse to book profits. A reasonable stock market correction could drive investors back into gold, which would be supportive for the precious metal.

If the Fed comes across as bullish then we could see a further surge in equity prices, which would put more pressure on gold prices.

The Fed tends to straddle a neutral path because on one-hand, it does not want to be the source of volatility in the stock market (which is code for causing a crash), but it also wants to reveal to investors the true condition of the economy (rather than lead the lambs to slaughter in the future).

Longer-term gold investors really don’t have a lot to worry about because we are 100% certain the Fed is not going to raise interest rates for years and it is going to maintain its pledge to provide as much money as the economy needs for as long as it needs it.

Short-term investors could face further heat at this time because they have shifted from chasing gold prices higher to waiting for gold to test a value zone. Before it was more important to just buy gold because of the fear of the unknown, now investors are looking for value so they can get more bang for their investment dollars. With that in mind, we think it is prudent to wait for a further pullback into $1621.90 to $1582.40.

Even if gold moves into a range, it will always be better to be holding a long position near the low end of the range than near the top.

For a look at all of today’s economic events, check out our economic calendar.