If you watched the price action in the gold market last week, you probably saw that its rally was fueled by two events: the dovish Fed minutes and weak U.S. economic data. Gains were likely limited, however, because of demand of higher risk assets.
December Comex Gold futures settled at $1275.30, up $14.30 or 1.13%.
After trading lower early in the week, gold prices surged on Wednesday after a drop in U.S. Treasury yields made the U.S. Dollar a less-attractive investment. This led to increased foreign demand for dollar-denominated gold.
The first two events that drove yields and the dollar lower were the U.S. Federal Reserve’s interest rate decision and monetary policy statement. As widely expected, the Fed unanimously declined to raise interest rates. However, in its monetary policy statement, it laid the groundwork to begin trimming its massive $4.5 trillion bond portfolio.
“The committee expects to begin implementing its balance sheet normalization program relatively soon,” said the Fed statement. This implied the central bank is ready to begin winding down its huge stimulus program in September rather than December as previously expected.
In assessing the economy, the Federal Open Market Committee held to its assessment that “activity has been rising moderately so far this year.” On inflation, the statement removed the word “somewhat” from June’s verbiage and said simply that inflation was running “below 2 percent”. This was only a subtle tweak, but nonetheless probably means Fed officials are a little more pessimistic about reaching their mandated objectives.
On Friday, gold surged again after the dollar weakened in reaction to underwhelming U.S. economic data. U.S. Gross Domestic Product growth picked up 2.6 percent in the second quarter, in line with expectations. However, first quarter GDP was revised downward to 1.2 percent.
The Employment Cost Index came in at 0.5%, below the 0.6% estimate and 0.8% previous read. A separate report showed the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, increased at a rate of 0.9 percent.
Revised University of Michigan Consumer Sentiment was 93.4, slightly above the 93.2 estimate and 93.1 previous read. This indicates that Americans appear the most optimistic about the current economic situation in the U.S. than they have in 12 years.
Forecast
Shortly before the Fed raised rates in June, December Comex gold reached a top at $1305.50. This lead to a break into $1211.10 on July 10. This created a retracement zone that traders have been watching at $1258.30 to $1269.40.