Gold futures finished higher for a fifth straight week with most of the rally driven by lower Treasury yields and a weaker U.S. Dollar. However, gains were limited by increasing demand for higher-yielding assets.
A surge in COVID-19 cases in the United States was not the reason for the rally in gold per se, but it did set off a series of reactions that contributed to gold’s strength. I tend to think that expectations of additional stimulus from the government and the Federal Reserve were the catalysts behind the rally.
Last week, August Comex gold futures settled at $1801.90, up $11.90 or +0.66%.
Gold doesn’t pay interest or a dividend but when interest rates get close to zero, it becomes more valuable because investors feel they can get a better return on their investment buying it than a Treasury bond.
Gold is also priced in U.S. Dollars so when the dollar weakens, foreign investors tend to buy it because it is relatively cheaper to them.
That’s all I can say about demand at this time. It’s being created by lower yields or a weaker dollar. Hope, fear and greed aren’t numbers, but these words make great headlines.
A second-wave of coronavirus cases could put the U.S. economy in hibernation again because it will likely lead to people staying at home. And when they are at home, they don’t spend a lot of money especially if they are out of world. This scenario can bring an economy to its knees.
However, the Fed has already pledged that they would not allow this to happen. In March, they unleashed a bazooka of ways to save the economy from destruction and this helped to stabilize the economy which states battled to gain control of the spread of the coronavirus.
For the most part, this strategy is working and we can see that because the better-than-expected economic numbers can prove it. However, the Fed has also been warning all along that the economy is weak and could take another hit if COVID-19 cases continue to increase.
Combined with the Fed’s warning, fear and uncertainty have put investors on alert, but rather than dump their positions in equities, this time around, they have decided to buy Treasurys for protection. Additionally, they are also probably buying gold as a hedge against a sell-off in the stock market.
Lower yields and a weaker dollar are likely to underpin gold prices this week, but stock market gains are likely to put a lid on gold prices.
Don’t watch the COVID-19 numbers or the headlines, but pay attention to the direction of Treasury yields. They’ll be able to tell us if this is going to be a “Risk On” or a “Risk Off” week.
Will gold finish higher for a sixth straight week? It all depends on weaker Fed policymakers believe the economy needs another shot of stimulus. If they do continue to push for stimulus in their speeches then gold is likely to remain underpinned.
If investors start to price in negative Treasury yields, Fed members continue to suggest help is on the way, or stocks begin a steep slide, then I can see gold spiking higher. Until then, it remains vulnerable over the short-run.
For a look at all of today’s economic events, check out our economic calendar.