After holding steady most of the week due to a weaker U.S. Dollar, a drop in Treasury yields and geopolitical tensions in Italy, gold prices retreated to finish lower after worries eased over Italy and a stronger than forecast U.S. jobs report raised expectations that the Fed will press ahead with another U.S. interest rate hike this month.
August Comex Gold futures settled the week at $1299.30, down $9.70 or -0.74%.
Four major events drove the price action in the gold market last week including political turmoil in Italy, worries over a U.S. – versus the world trade war, a drop in U.S. Treasury yields and better-than-forecast U.S. jobs data.
Volatility in the Italian bond market first drove the Euro to a 10-month low, pushing the U.S. Dollar Index to a multi-month high. This pressured gold prices since it is a dollar-denominated asset. Losses were limited because this news also drove down U.S. Treasury yields.
However, late in the week, political turmoil eased in Italy, fueling a rebound in the Euro, breaking its six-week losing streak. The Euro was supported by a drop in Italian bond yields after a revived coalition deal between two anti-establishment parties pulled the country back from snap elections. This news helped drive the dollar lower, underpinning gold prices.
President Trump also provided some support for gold following his announcement Thursday of new tariffs on imported metals, raising concerns over a potential global trade war. Canada, Mexico and the EU all said they plan to retaliate with levies on billions of dollars of U.S. goods from orange juice and whiskey to blue jeans to Harley-Davidsons.
Treasury yields fell early last week as investors continued to react to the Fed’s dovish May monetary policy minutes which indicated the central bank would allow inflation to move above its 2 percent mandate. This lowered the chances of at least three more rate hikes this year.
Yields were pushed down this week by fears over a euro zone crisis, but moved a little higher on Friday after the U.S. Labor Department’s May jobs report showed solid wage gains, making a rate hike in June near-certain, and increasing expectations of a fourth hike this year.
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The geopolitical tensions last week combined with the drop in Treasury yields, set the table for a gold market rally but buyers never showed up and prices retreated.
Technical factors also played a role in the price action with gold having trouble with a major retracement zone at $1300.60 to $1315.60. Overtaking $1315.60 will be bullish while a sustained move under $1300.60 will indicate the selling is getting stronger.
Given the strength of the U.S. jobs report and the certainty of the rate hike in June, gold is likely to remain under pressure if this results in higher Treasury yields and further strength in the U.S. Dollar.
Gold prices could pick up strength if the dollar weakens. This could happen if the Euro rallies now that the new prime minister has been sworn in to lead the populist government.
Gold could also be influenced if the developing trade war escalates, but then again gold could weaken now that it appears the meeting between the United States and North Korea is back on.
There are many contradictions in the market at this time which could help hold gold in a range. So at this time, it’s probably better to stop reading the headlines and only watch and react to the direction of Treasury yields.
Essentially, falling Treasury yields will be supportive for gold, while rising yields will be bearish for the precious metal. Additionally, the trend is down and not likely to change unless there is totally unexpected news that forces Treasury yields lower like a major flight to safety rally.