Precious Metals Watch – USD weakness but no gold rally

by: Georgette Boele

In this publication: Gold prices experienced an aggressive temporary sell-off, but the sell-off stopped above the 200-day moving average and this is positive for the future price outlook. US dollar weakness has not resulted in a rally in gold prices because of offsetting factors

170628-USD-weakness-but-no-gold-rally-2.pdf (355 KB)


This week gold prices experienced an aggressive short-lived sell-off. Prices fell from USD 1,254 to 1,238 per ounce before they rebounded somewhat. For us the most important conclusion from this sell-off is that despite the aggressive selling pressure, gold prices managed to stay above the 200-day moving average, which is around USD 1,235 per ounce at the moment. This by itself is a positive signal as the longer-term trend continues to point to higher prices. But there are more interesting developments currently playing out, which we will discuss below.

Weakness in US dollar…

One of the reasons why financial markets are never boring is that any situation can look familiar, but is always slightly different than before. Take for example developments in financial markets since yesterday. Yesterday morning, financial markets mainly focussed the hawkish comments from ECB president Mario Draghi, as they were searching for a reason to push the euro higher. Mr Draghi’s words resulted in a narrowing of the 10y government bond spread between the US and the eurozone. Hence this was positive for EUR/USD. A few hours later, Fed Chair Yellen said that the course of the Fed has not fundamentally changed. Consequently, US Treasury yields also rose (but not as much as their German counterparts), as there was a small upward adjustment in the expectations of future Fed rate hikes. This, and the rise in US real yields have not supported the US dollar versus most currencies except the yen. Why is this? For a start, government bond yields elsewhere (for example in Germany) outpaced the rise in US Treasury yields. Moreover, expectations about monetary policies have changed in a number of countries (with the exception of Japan). In short, more central banks are playing with the idea of removing stimulus and this has supported their currencies versus the US dollar. Furthermore, investors seem to have doubts about the strength of the US economy and whether Trump’s policies will support the economy. This and comments from Fed Chair Yellen that some financial assets had become “somewhat rich” have weighed on US stocks. Finally, political uncertainty in the US remains relatively elevated.

…but no rally in gold prices?

If the US dollar is moving lower, then gold prices should rise, right? Not so fast. In the case of gold prices, the above mentioned dynamics play out differently. On the one hand, a lower US dollar and lower equity markets are supportive for gold prices. On the other hand, the modest rise in US real yields and expectations of less accommodative monetary policies ahead are negative forces for gold, as investors will find gold less attractive as investment asset because gold does not pay interest. As a result of these offsetting forces, gold prices are currently trading close to our end of quarter forecast of USD 1,250 per ounce.

For the coming weeks we expect that these offsetting factors will prevent gold prices from taking-off. For the remainder for this year we expect gold prices to profit slowly but surely from a weaker US dollar and to rise at a modest pace. Our year-end forecast for 2017 and 2018 are USD 1,300 and USD 1,400 per ounce respectively.