Gold prices are surging on Thursday after successfully testing the upper range of a key retracement zone at $1272.70 to $1253.00, and defending the low for the year at $1267.30. The rally is being helped by a drop in U.S. Treasury yields and lower demand for risky assets, in response to escalating tensions between the United States and China. The U.S. Dollar Index is providing some support because it has backed off its earlier high.
At 12:38 GMT, June Comex gold futures are trading $1282.00, up $7.80 or +0.63%.
Late Wednesday, the U.S. Federal Reserve minutes failed to surprise gold traders, leading to a muted reaction. The Fed was accommodative in its minutes when it reiterated that investors should remain “patient” and that rates will remain at current levels for a long time. The U.S. Dollar rose after the minutes were related, keeping a lid on gold prices.
However, there is a wild card out there. The Fed may not see a rate cut in the near future, but futures traders are pricing in at least one rate cut later this year. Gold prices could rally over the near-term if speculative buyers start to price in a rate cut. Gold could develop a strong uptrend if the Fed actually cuts rates.
Once again, Fed policymakers seem to be arriving late to the party. What this means is that the last Fed monetary policy meeting took place on May 1 -2. At that time, the world thought the U.S. and China were close to a trade deal. Since then, trade tensions between the two economic powerhouses have escalating, raising concerns over an economic slowdown in the global and domestic economies.
Fed policymakers this week have said that they are comfortable with where interest rates are. However, this assessment may be based on data that was accumulated before the escalation of U.S.-China trade tensions.
The Treasury markets indicate the Fed will cut rates. Stocks are weakening as investors price in a prolonged trade dispute with no end in sight. Both factors could be supportive for gold. However, gains are likely to be limited if the dollar continues to rise.
We may see periodic short-covering spikes to the upside by gold, but we’re not likely to see a prolonged rally unless the U.S. economy starts to weaken, and the Fed starts to take about a rate cut later in the year.
This article was originally posted on FX Empire
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