Gold futures spiked higher last week after consolidating for six weeks. Some of the move was fueled by a weaker U.S. Dollar and a steep drop in global equity markets, but most of the rally was fueled by China allowing the yuan to dip below 7 yuan per dollar and a plunge in global bond yields that raised concerns over a worldwide recession.
For the week, December Comex gold settled at $1508.50, up $51.00 or +3.50%.
Some people like to call it safe-haven buying, but I prefer to trade gold using its relationship with interest rates as my guide. Who knows what safe-haven buying even means. I just know that when rates go down, gold tends to go up.
Early last week, China shocked the markets when it allowed its currency to drop below 7 yuan per dollar. Since it was likely in retaliation to the new tariffs announced by President Trump on August 1, I think it was China’s way of saying, “We have weapons too.” China would like nothing more than to cause a recession in the U.S. if it would mean a Democrat beats Trump in the 2020 elections. They feel a Democrat would be easier to deal with.
The move by China also likely means that it is digging in and not likely to strike a trade deal with the United States until after the elections. Trump also added late in the week that he may cancel the upcoming trade talks scheduled with China in Washington in September.
The other major event last week was the Reserve Bank of New Zealand’s 50-basis point rate cut on August 7. Traders were looking for a 25-basis point cut. This move sent a signal to traders that rates were going to continue to come down.
Negative rates from some central banks and the possibility of more negative rates to follow from other central banks is what is making gold such an attractive asset.
Gold doesn’t pay interest, but that’s better than having to pay a central bank to borrow your money.
We’re going to keep a close eye on China’s yuan. A prolonged move under 7 yuan per dollar could shake up the financial markets. This will put pressure on global bond yields, leading to another surge in gold prices.
If the Chinese Yuan stabilizing then so will yields and stocks. This would likely encourage gold traders to book profits. However, the next wave of buyers will likely come in when gold hits a value area.
With the markets already pricing in a 100-percent chance of a 25-basis point Fed rate cut in September, I think investors will be searching for reasons for a 50-basis point cut. The RBNZ opened the door to that possibility last week.
With a 50-basis point rate cut possibly on the table, gold investors will be watching this week’s U.S. consumer inflation, retail sales and Philly Fed Manufacturing Index reports. Weak reports could support an aggressive rate cut by the Fed.
Gold traders should also pay attention to the Australian Employment Change and Unemployment Rate reports. Weak reports could encourage the Reserve Bank of Australia to cut rates more aggressively.
Continue to monitor the global bond yields. They are your best indicators.
This article was originally posted on FX Empire
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