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Gold to Remain Range Bound as Investors Weigh Fed and Europe

Gold to Remain Range Bound as Investors Weigh Fed and Europe

Christopher Vecchio, CFA, Senior Strategist
Gold_to_Remain_Range_Bound_as_Investors_Weigh_Fed_and_Europe_body_Picture_5.png, Gold to Remain Range Bound as Investors Weigh Fed and Europe

Gold to Remain Range Bound as Investors Weigh Fed and Europe

Fundamental Forecast for Gold: Neutral

Perhaps Friday is an indication of things to come for the precious metals complex. While the US Dollar was busy rallying sharply against the Euro and posting modest gains across the rest of the majors (save the Japanese Yen), Gold was busy posting a 0.19 percent gain on the day, pulling close to unchanged on the week, finishing down only 0.32 percent overall. There were a number of things at work for and against precious metals this week, but mainly it boiled down to two things: the Federal Reserve and whether or not QE3 will be implemented; and the financial stresses in Europe. Accordingly, given the likelihood of QE3 and the financial conditions in Europe, we expect Gold to be skewed to the downside going forward.

At his Semi-Annual Monetary Policy Report to Congress this week, Federal Reserve Chairman Ben Bernanke discussed a few pertinent points that should clarify his stance on more accommodative efforts from the Fed. They can be summarized as such: the US economy is slowing, more needs to be done, the Fed may not be the best institution to help the economy, fiscal authorities need to do more, and the Fed will only do more if it is completely necessary. Is it completely necessary at present time, when longer-term US Treasury yields (and thus mortgage rates) hold near all-time lows? Absolutely not. But is the US economy struggling, thus justifying further stimulative measures? Perhaps. Regardless, no definitive answer to this question is another sign of uncertainty for market participants, which should weigh on Gold. When this stance shifts – which it will – to a more definitive pro-QE3 position, Gold should be very well supported. But for now, this is not the case.

Accordingly, the European sovereign debt crisis has created quite the tug-and-pull on commodities over the past several weeks, and this is likely to continue. On one hand, the promise of more liquidity from the Euro-zone’s financial leaders will boost Gold in the near- and long-term. However, with no new measures proposed and the current ones deemed inadequate – as evidenced by rising Italian and Spanish bond yields and the major sell-off on Friday by European equity markets – it’s likely that demand for the most liquid asset, cash (US Dollars), will be high and thus the demand for Gold will be dampened.

In terms of data for the week ahead, our main focus lies on the US GDP print for the second quarter which will be released on Friday. At an expected print of +1.4%, this would represent a major letdown from the initially projected +3.0% figure for the first quarter. The +1.4% reading would also come in below the prior +1.9% reading. In all likelihood, a weak US GDP print will result in a US Dollar sell-off, which in turn should bolster QE3 expectations, and thus, support Gold.

With the second quarter US GDP print coming on Friday, there’s four days of room for European concerns to hold back Gold. As such, we suspect some consolidation if not downside price action at the beginning of the week, and Friday to offer the opportunity for some major upside on a disappointing growth reading. As such, given these influences, we believe Gold will remain range bound in the week ahead, and we hold a mostly neutral tone towards precious metals going forward. –CV

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.