Gold futures finished higher for a second day as the dollar weakened on Tuesday. The market has also nearly recovered all of last week’s loss. Despite the positive price action, the trend is still down. The market is also lower for the month.
April Comex gold futures settled at $1330.40, up $4.00 or +0.30%.
Gold showed limited upside reaction last week to the volatility in the stock and bond markets, perhaps because investors viewed the weakness in the equities markets as a “healthy” correction due to overvalued stocks.
However, the presence of volatility and the uncertainty ahead of Wednesday’s U.S. consumer inflation report may be driving investors into the safety of gold, the Japanese Yen and the Swiss Franc.
In addition to the weaker dollar, the yield on 10-year Treasury notes slipped to 2.846%. The yield during Monday’s session climbed to a four-year high of 2.891% before settling at 2.857%.
Additionally, a downtrend combined with the counter-trend rally may be an indication that the buying in gold is actually hedge protection against a further weakness in the stock market. Uncertainty ahead of Wednesday’s U.S. consumer inflation report could also be underpinning gold.
In other news, the NFIB Small Business Index came in higher than expected at 106.9. Traders were looking for 106.2.
Federal Reserve Chairman Jerome Powell suggested that the U.S. central bank would push ahead with gradual interest-rate increases even as it remains on the lookout for threats to the financial system in the wake of the recent stock market rout.
“We are in the process of gradually normalizing both interest rate policy and our balance sheet,” he said Tuesday in the text of his ceremonial swearing-in speech in Washington, adding. “We will remain alert to any developing risks to financial stability.”
Cleveland Fed President Loretta Mester said on Tuesday that the turmoil hadn’t affected her economic outlook or her support for further interest-rate hikes.
“If economic conditions evolve as expected, we’ll need to make some further increases in interest rates this year and next year, at a pace similar to last year’s” when the Fed raised rates three times, she said in a speech in Dayton, Ohio.
Traders are calling Wednesday’s U.S. Consumer Inflation report the most important inflation report in 10 years. Inflation has been impacting the financial markets lately, and investors are preparing for a report that could trigger a volatile reaction in the stock and bond markets.
Economists are expecting January core inflation, excluding food and energy, at 0.2 percent or 1.7 percent year over year, a slower pace than December.
A stronger than expected inflation report could drive stock prices lower and bond yields higher and ultimately prompt the Fed to raise interest rates faster than the three hikes it currently forecasts for this year.
We could be looking at a volatile two-sided trade in gold futures. If stocks get hit hard like last week and gold traders react the same way to the volatility then prices could retreat. Gold traders especially fear soaring interest rates because the precious metal does not pay interest, diminishing its appeal to investors.
Weaker than expected inflation data could trigger a further rally in gold with $1339.80 to $1347.00 the primary upside target. Here’s where it gets a little tricky. Weak inflation is also likely to send stock prices soaring. This could actually trigger a break in gold because investors who hedged against another stock market break may choose to sell those hedge positions.
The safest call at this time is for renewed volatility. The direction of the market is hard to predict because of the number of variables influencing the price. If I had to pick one factor that will influence gold prices the most it would be the direction of the U.S. Dollar. Gold should move opposite the direction of the dollar.
This article was originally posted on FX Empire
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