Price of Gold Fundamental Weekly Forecast – Underpinned by Dovish Fed but Gains Limited by Safe-Haven Demand for Dollar

Gold finished higher last week, but the response to the dovish Federal Reserve monetary policy decisions was weak. Gold also showed a disappointing response to the weak economic data from the Euro Zone on Friday that exacerbated fears of a global slowdown. The price action doesn’t suggest that sellers are stopping the market from rallying, but it could be indicating the lack of buyers.

Last week, June Comex gold futures settled at $1318.70, up $9.80 or +0.75%.

At mid-week, gold received a boost after the Fed brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year. On Friday, gold was bid after economic surveys showed business across the Euro Zone performed much worse than in March as factory activity contracted at the fastest pace in nearly six years, hurt by a big drop in demand.

After weeks of liquidation, professional money managers may have started to return to the long-side of the gold market. According to the latest government data, gold speculators lifted their bullish bets after three down weeks.

Analysts at TD Securities summed up the price action this way, “Price action in gold continues to lend strength to our view that expected data deterioration will help spark a gold rally as interest rates continue to fall in the context of a slowing global economy.”

Weekly Forecast

Gold prices are primarily driven by the direction of the U.S. Dollar, and the dollar is primarily controlled by the direction of U.S. Treasury yields. However, the dollar can also be driven by safe-haven buying. The direction of the U.S. Dollar Index is mostly dictated by the direction of the Euro.

While calls for a U.S. recession rose on Friday when the 3-month T-Bill and 10-year Treasury yields inverted, gold was merely underpinned by the news. This was because the Euro plunged on the weak Euro Zone economic news, pushing the U.S. Dollar Index higher and leading to lower demand for dollar-denominated gold.

Last week’s price action suggests gold is likely to be supported by falling U.S. rates, but we’re not likely to see a steep rise in prices unless the U.S. Dollar weakens. Based on this assessment, we’re expecting a sideways to higher trade.

This week’s U.S. reports are limited to consumer confidence and Final GDP. In the Euro Zone, European Central Bank President Mario Draghi will speak. Unless the combination of bearish economic data and a friendly Draghi materializes, gold’s upside will be limited. Furthermore, we’re going to have to see more aggressive buying by the funds to launch another rally in gold.

Another way to put it, gold prices are likely to be capped as long as the U.S. Dollar remains the safe-haven asset of choice for investors.