Gold Price Forecast: Weak Corrective Gains, Defensive Support Still Lacking

July 1, 2018 — 10:15 AM EDT

The dollar has shown signs of losing momentum against European currencies, which limits the scope for gold selling unless there is extremely strong U.S. data and pressure for the Fed to accelerate monetary tightening. Overall, speculative positioning has shifted, but not yet enough to signal a major trough in prices.

Gold remained under pressure during the week and tested fresh seven-month lows below $1,250 per ounce before a slight correction to trade just above this key level at Friday's close. Precious metals were again unable to derive defensive support when risk appetite deteriorated, while currency market influences were eventually close to neutral as the dollar failed to hold its best levels against European currencies.

After a lackluster week for U.S. economic releases, data will assume greater importance in the week ahead. The ISM manufacturing index will be released on Monday, with the non-manufacturing data on Thursday. The key employment report is due for release on Friday and will inevitably grab market headlines. The headline change in non-farm payrolls, unemployment rate and data on average earnings will all be important for sentiment surrounding the economy and Federal Reserve policy. Any surge in earnings growth would increase pressure for the Fed to respond more aggressively.

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The Federal Reserve Open Market Committee (FOMC) minutes from June's meeting will be released on Thursday, with markets looking at detailed rhetoric on inflation and whether there are significant underlying concerns surrounding trade prospects. Markets have priced in around a 70% chance that interest rates will be increased at the September meeting but less than a 50% chance of two further rate hikes this year. In this context, hawkish rhetoric and stronger hints surrounding two rate hikes this year would tend to boost the dollar and undermine gold. Evidence of increased Fed doubts, especially surrounding trade, would tend to damage the U.S. currency and support precious metals.

Wider currency-market trends will again need to be watched closely, with gold much more likely to demonstrate resilience if commodity currencies can continue to correct stronger against the U.S. currency. Emerging-market trends will continue to be important amid underlying volatility and unease surrounding tighter financial conditions. Renewed stresses in countries such as Brazil and South Africa would tend to underpin gold. In this context, the Mexican peso’s reaction to presidential and congressional elections will also be important. A negative reaction to an expected victory for leftist candidate Obrador would tend to amplify wider emerging-market tensions and underpin gold.

Global trade developments will also be important given persistent concerns surrounding the threat of a U.S.-China trade war, with the U.S. tariffs on Chinese imports due to come into force on July 6 unless there is a breakthrough before then. Aggressive rhetoric, retaliation and a further lurch toward protectionism would increase fears over global economic damage and theoretically support gold. During June, however, a crucial market factor was that gold failed gain when risk appetite has deteriorated. It would be dangerous to assume that this pattern will continue, especially if wider market volatility increases.

The latest CFTC data recorded a decline in net long, non-commercial gold positions to 76,700 in the latest week, the smallest net long position for over 11 months. The reduction in long positioning will tend to limit the scope for further aggressive gold selling, although underlying sentiment does not appear negative enough to trigger a sustained shift in market direction.