Gold futures posted a two-sided trade last week before closing only slightly lower. Investors had a lot on their plates last week, dealing with Trump administration issues, the U.S. Dollar, interest rates, Brexit and French presidential elections.
June Comex Gold futures closed the week at $1251.20, down $0.50 or -0.04%.
Comex gold futures started the week more than 1 percent higher after President Trump’s failure to put through a healthcare reform package the previous Friday raised questions over his ability to deliver promised tax cuts and spending plans.
This news drove the U.S. Dollar into a four-month low, making dollar-denominated gold a more attractive investment.
Gold prices retreated the rest of the week after the dollar strengthened due to hawkish commentary from several Fed officials.
Sellers started to hit gold after Federal Reserve Vice Chairman Stanley Fischer said two more increases of U.S. overnight rates this year seemed “about right”.
In an interview with CNBC, Dallas Federal Reserve Bank President Robert Kaplan and Chicago Fed Chief Charles Evans also put the emphasis back on the prospect of more increases in U.S. interest rates.
Kaplan, who said he sees inflation and employment approaching the Fed’s goals, continued to advocate a gradual pace of rate increases to avoid shocking the economy. “You don’t want to just slam on the brakes. You want to ease off the accelerator first,” he said. At the same time, “monetary policy does operate with a lag,” so it makes sense to lift rates before inflation hits the Fed’s 2 percent goal.
Evans said two interest-rate increases may be the right amount of tightening for the U.S. economy this year given uncertainty surrounding the outlook for inflation and government spending.
“To the extent that I gain more confidence in the forecast I have, that would be a good indicator that I could perhaps support three,” Evans said on March 27. “Two might be the right number if there’s a little bit more uncertainty.”
The filing of Article 50, a move which started the formal negotiations for the U.K.’s exit from the European Union, went off without a hitch, giving gold investors an excuse to book profits. Dampened fears over the outcome of the French Presidential elections also helped drive gold investors out of the market.
Despite the bearish news which drove weak longs out of gold last week, the market was able to recover most of its losses into Friday’s close. The market also posted its biggest gain since the first quarter of 2016.
The same news events that influenced the price action last week are going to be back this week. One of the main reasons for interest in gold is volatility in other asset classes.
Although we could see violent price swings in gold this week, ultimately, the direction of U.S. interest rates are going to dictate the movement in gold.
We expect Fed speakers to continue to issue hawkish commentary supporting at least two interest rate hikes, but investors may be held hostage as they await the Fed minutes on Wednesday and the U.S. Non-Farm Payrolls report on Friday.
Gold is likely to rally if the Fed speakers can’t drive the dollar higher. This would suggest that Treasury investors feel otherwise about the direction of interest rates. However, if the Fed speakers remain hawkish and the dollar continues to climb then look for last week’s selling pressure to resume.