Guest post from James Broth:
Gold dipped slightly as the new week get underway after breaking down below the important support level of $1,265 last Friday. The main reason behind last week’s decline in gold prices was that many investors exited gold investments to stay on the sidelines on rumors that President Trump was set to announce the next Fed chair. News concerning the Federal Reserve often affects gold prices because the Fed technically determines how the USD trade in the forex markets and gold is priced in USD. This piece examines how economic and forex developments could provide head and tailwinds for the yellow metal as the year draws a curtain.
The new week is data packed
Many investors buy gold because of its inherent stability; at least, in relation to other assets such as stocks. However, the underlying fundamentals of gold stability will be put to the test as different news of economic importance hit the newsstands. The economic calendar shows that the U.S. Federal Reserve will release the customary policy statement following its two-day meeting on Wednesday. The policy statement will provide insights into the Fed’s plan for interest rates going forward.
If the fed is inching towards making a decision to support a rate hike, you can reasonably expect gold to suffer a decline in the coming weeks. People with eye to spot political trends have already observed that President Trump is likely to nominate Fed governor Jerome Powell. The prevailing market sentiment sees Jerome Powell as more neutral than other contenders; hence, a sense of normalcy can be restored to the Fed.
On Friday, the market will be treated to the October reading of the monthly jobs report. An uptrend in hiring data could suggest an improvement in economic trends; thereby, giving investors fewer reasons to buy gold. Gold becomes more attractive in times of economic uncertainty; hence, a decline in employment data could signify weakness in the economy and boost interest in gold.
In international markets, the Bank of Japan will hold its policy meeting to review interest rate policies. The Bank of England will also hold a similar meeting this week. The outcome of such meetings would in turn have a direct influence on where gold price is headed.
Onslaught of economic data could trigger forex headwinds/tailwinds for gold
As the economic data rolls in this week, traders will be paying attention to how the economic data swings the USD. Asher Crabber, a trader on ETX Capital’s forex trading platform where you can trade forex and commodities notes that “weakness in the USD could be good news for gold because a weak dollar makes gold and other commodities cheaper for investors in foreign markets”.
The effect of the forex fluctuations on the prices of commodities such as gold is particularly obvious when you consider the fact that the AMEX Dollar Index is down 7.56% in the year-to-date period. In contrast, gold prices have gained about 10.52% in the same period as seen in the chart above.
However, economic news is only one of the many factors that will determine how gold and other commodities will trade during the rest of the year. One of the key factors that could determine gold prices going forward is the unending strive between bearish and bullish investors for the control of the market.
From a bullish perspective, Bob Haberkorn, senior market strategist at RJO Futures notes that “there’s some interest coming back into [gold] down at these levels… There’s reluctance down here for the bulls to take anything off.” From the bearish standpoint, analysts at SG Forex submit that “the front end of the U.S. rates curve doesn’t seem to have priced in a Taylor Rule Fed … which means that a surprise would send yields and the dollar higher, and risk assets down.”
Thanks to James Broth.
The Deviant Investor