Price of Gold Fundamental Daily Forecast – Yields Still Dictating Gold’s Direction

Gold jumped to its highest price since February 25 on Wednesday as falling U.S. Treasury yields and dropping global equity markets provided support. The catalyst behind the moves are surging coronavirus cases which revived fears about the global economy.

The rise in coronavirus cases is creating uncertainty. When there is uncertainty, investors tend to dump stocks. But they also tend to buy Treasury bonds. When they do that, yields fall, dampening the appeal as the U.S. Dollar. Since gold is dollar-denominated, a falling dollar tends to make gold a more attractive asset. That’s one bullish outlook for gold.

Another outlook could put a limit on gold’s gains. This one involves the safe-haven buying of the U.S. Dollar. Last year when the pandemic began, the Federal Reserve flooded the market with U.S. Dollars. Every global central bank demanded U.S. Dollars for safety, and the greenback rose sharply.

Investors haven’t forgotten this. And they have still been buying dollars during times of uncertainty – the so-called “safe-haven bid”. We’re seeing a little bit of this at this time so gold is facing some headwinds.

I wouldn’t call it “safe-haven” buying of gold. I think that the price action in gold since August 2020 clearly shows that gold is not a safe-have asset. What’s driving gold higher are expectations of lower interest rates.

Daily Forecast

If the Fed says interest rates will remain lower for some time during a period when inflation is spiking and other sectors of the economy are surging then what do you think it will say if a sharp rise in coronavirus cases dampens the economy even a little?

In my opinion, gold prices overshot to the downside when Treasury yields were spiking higher amid speculation that the Fed would have to raise interest rates sooner than expected. Gold is recovering because yields are falling as investors now believe that this won’t be the case.

Gold is likely to remain strong until Treasury yields find the “sweet spot” or balance point. But I don’t see it overtaking last year’s highs because rising vaccinations will eventually slow down the spread of the virus.

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