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Gold Fundamental Forecast: S&P 500 Direction May Influence XAU Amid Gold-ETF Selling

Gold Fundamental Forecast: S&P 500 Direction May Influence XAU Amid Gold-ETF Selling

Thomas Westwater, Analyst

Gold Fundamental Forecast: Neutral

  • Gold prices fell last week after selling picked up on Friday
  • That was despite a surge in Treasury yields and the US Dollar
  • A relief rally in the stock market may offer a tailwind for bullion

Gold prices accelerated to the downside on Friday but prices were little changed despite a stronger US Dollar and higher nominal Treasury yields. The FOMC rate hike announcement lifted prices initially. Sellers returned on Thursday and Friday, but prices managed to hold above Tuesday’s pre-FOMC level. The Swiss National Bank (SNB), the Bank of England (BoE) and the South African Reserve Bank (SARB) hiked rates as well, tightening global monetary conditions.

It was surprising to see gold’s modest reaction considering the movement in the bond and currency markets. The 2-year Treasury yield rose more than 20 basis points to the highest level since October 2007. And the US Dollar DXY Index gained north of 1.5%, putting prices within 1% of the June 2002 high. The last time the 2-year yield crossed above 4%, gold was trading around 431. That was in 2005. A contextual comparison shows an interesting picture.

Gold prices rose from 431, ending above the year above 500 despite the 2-year yield rising over 30 basis points during the same period. The Federal Reserve was also hiking rates in 2005, another similar element (pun intended). Rates started falling in 2007. Gold continued to rise and was at 840 in 2007. That said, long-term investors may see a discount here if they are willing to absorb some downside to wait out a Fed pivot, which looks further away after this week.

The weekly outlook may depend on the stock market and broader sentiment. The S&P 500 is down more than 10% from its August high, and bullion fell alongside stock indexes on Friday. A relief rally wouldn’t be a big surprise, given the move. Total known holdings of gold in exchange-traded funds (ETFs) fell to the lowest level since January, showing strong gold selling in the stock market. The underlying price is vulnerable to that selling, drawing a solid correlation between the two (see chart below). A lower US Dollar would likely accompany bullish stock market movement, providing another tailwind for gold.

Gold (XAU) and Total Known Gold ETF Holdings – Daily Chart

Chart  Description automatically generated

--- Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

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

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