Gold futures finished lower last week as a stronger U.S. Dollar helped make the dollar-denominated asset a less-attractive investment. Several factors helped pressure gold and boost the dollar including expectations of higher interest rates, strong U.S. economic data and a weaker Euro.
Gold hit a fresh six-week low late in the week, but a strong performance in silver, coupled with profit-taking in the U.S. Dollar ahead of the week-end, helped the market recover nearly half of the week’s loss.
For the week, December Comex Gold futures settled at $1196.20, down $5.10 or -0.42%.
U.S. Federal Reserve’s Influence
Last week, the Fed played a role in driving the dollar higher and gold lower. The Fed raised its benchmark interest rate by 25 basis points to a range of 2%-2.25% last week. This move was widely expected and fully-priced into the gold market for weeks. However, Fed policymakers also strongly hinted that the central bank would raise rates again in December, three times in 2019 and once more in 2020. This news pressure gold.
Fed Chair Jerome Powell also said the economy is strong enough that aggressive stimulus is no longer necessary. This confidence was shown by the Fed ending its description of its policy as “accommodative”.
Powell also said the rate hike reflected the Fed’s confidence in the U.S. economy, describing it as a “particularly bright moment”. Powell also warned that a permanent shift to a “more protectionist world” would hurt the U.S. and global economies, but added that for now, he expects the overall economic impact to remain relatively modest. “We don’t see it in the numbers,” he said at a press conference in Washington after the meeting.
Fed officials now expect the U.S. economy to grow by 3.1% this year, faster than the 2.8% forecast in March, according to the projections released after the meeting. Their predictions for inflation remained unchanged at around 2%.
U.S. Economic Data
Final US. GDP rose 4.2% during the second quarter. Core Durable Goods Orders came in at 0.1%. Durable Goods Orders rose 4.5%. The Core PCE Price Index was flat, but Personal Spending rose 0.3%. The Conference Board’s Consumer Confidence hit an 18-year high at 138.4. University of Michigan’s Consumer Sentiment, however, came in slightly below expectations at 100.1.
Weak Euro equals Weak Gold
Helping the U.S. Dollar climb to a two-week high against a basket of currencies was a weaker Euro. Concerns about the Italian budget weighed on the single currency. The EUR/USD fell below $1.16 for the first time in two weeks after Italy’s government agreed on a budget seen by some investors as defying Brussels. Political wrangling over the budget in heavily indebted Italy put a lid on the Euro’s recent rally.
Although the direction of gold prices will be primarily influenced by the U.S. Dollar. Traders should also pay attention to the price action in the silver market.
Silver futures surged to their highest level since August 30 on Friday. Its divergence from gold is making the metal an attractive asset. Gold, for example, hit its lowest level since August 17, while buyers were moving silver sharply higher. At this time, gold is being led higher by silver, which means the “tail is wagging the dog.”
Silver is being supported because it is relatively cheap. Additionally, it could be attracting buyers due to inflationary expectations and industrial demand during the current economic expansion. As of Friday’s close, the gold-silver ratio is about 85:1. This makes it a more attractive asset relative to gold. This may be just enough to bring in the buyers. Now that the news is out there, look for heightened volatility.
Economic news that could influence the U.S. Dollar and gold prices next week are U.S. ISM Manufacturing PMI, ISM Non-Manufacturing PMI, and the Balance of Trade.
Additionally, investors will get the opportunity to react to the September Non-Farm Payrolls report. The headline number is expected to show the economy added 185K jobs last month. Average Hourly Earnings are expected to have risen 0.3% and the Unemployment Rate is expected to dip to 3.8%.
The dollar will continue to be influenced by Treasury yields and worries over Italy. We’re going to approach the market early in the week as if a stronger dollar will make gold weak. However, we’ll quickly shift to an upside bias if another rally in silver takes control of the gold market and drags prices higher.