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While lower yields and the sell-off in stocks have helped prop up gold prices, or at least prevent a wash-out to the downside, prices aren’t going to rise much unless the U.S. Dollar gets hammered.

Last week’s price action in gold indicates that buyers know where the value is, but the lack of conviction may be holding them back. This is likely because of the strong U.S. Dollar. However, if you look at the price action, particularly on May 23, you’ll see just how powerful of an influence a combination of a weaker U.S. Dollar, a drop in Treasury yields and lower demand for risky assets can be on gold prices.

Keep those three factors in mind when trading gold because all three, working in sync, have been driving the price action in gold over the short-run.

Just look at gold’s performance in 2019. As of Friday’s close the August Comex gold futures contract is trading at $1289.20, down $11.00 for the year. Nearly a month ago, gold hit its low for the year at $1273.20.

Last week, 10 and 30 year Treasury yields hit their lowest levels in about 17 months. Gold showed hardly any reaction to this news. Stocks have been under pressure since the first week in May, yet gold is on pace for a flat to slightly lower close for the month. I chalk this up to the strong U.S. Dollar which hit a multi-year high against a basket of currencies last week.

While lower yields and the sell-off in stocks have helped prop up gold prices, or at least prevent a wash-out to the downside, prices aren’t going to rise much unless the U.S. Dollar gets hammered.

On May 23, interest rates plunged, stocks fell, the US. Dollar Index formed a closing price reversal top and gold prices spiked higher. One event caused the price action, the release of a weaker-than-expected U.S. manufacturing PMI report.

It wasn’t Brexit, Theresa May’s Resignation or uncertainty over European Parliamentary Elections, despite what the headline writers at the news websites want you to believe. It was the fear of a weakening U.S. economy. If the U.S.-China trade stalemate continues over the long-term then we’re likely to see more weakness in the U.S. economy.

However, don’t expect any action by the Fed unless cracks start to appear in the labor market and inflation starts to weaken. If those occurs then expect the Fed to start talking about a rate cut. If policymakers start to do this then gold should start to rally.

If the Fed does decide to cut rates then the dollar should weaken against a basket of currencies and dollar-denominated gold should spike higher.

Source: FXEmpire