Gold prices have been under pressure this week on optimism about the economy, with equities and Treasury yields stronger on Tuesday as a result, analysts said.
Comex August gold was down $22.20 to $1,711.80 an ounce as of 9:53 a.m. EDT. At the session low, the contract had lost $42.70 so far for the week. July silver was down 25 cents to $18.01.
“It’s really a story of economic optimism and strength in the stock market,” said Phil Flynn, senior market analyst with at Price Futures Group.
“The ADP jobs report came out a lot better than expected, and the stock market is on a tear… some of the worst-case fears about the economy continuing to contract have gone away.”
As a result, he continued, the buying of gold as a hedge against economic uncertainty has been reduced, with some investors leaving gold for stocks. The Dow Jones Industrial Average was around 265 points higher, building on top of other recent gains.
Edward Meir, an independent commodity consultant with ED&F Man Capital Markets, commented that precious metals turned south in the hour after the ADP private-sector jobs report.
“Although jobs dropped by 2.76 million in May…the drop was much less than the 9 million expected,” Meir said.
The decline also was nowhere near as severe as the revised 19.56 million plunge from April.
Not only are stocks rallying, but Treasury yields are also higher, pointed out Charlie Nedoss, senior market strategist with LaSalle Futures Group. Higher interest rates tend to hurt gold.
“Some money is starting to move into cyclicals in the equity market with thoughts of a broader recovery, not of the stock market, but of the economy,” Nedoss said.
He added that sell stops were likely triggered this week as August gold fell below the 20-day moving average near $1,738 an ounce and the 15-day near $1,750. Stops are pre-placed orders activated when markets move through certain chart levels. August gold has been as low as $1,709.
The weakness in gold is occurring despite a recent slide in the U.S. dollar, Flynn pointed out. Normally, a declining greenback helps gold. Further, Flynn noted, gold is falling despite all of the recent quantitative easing undertaken by central banks to combat the economic fallout from the COVID-19 pandemic, which also is considered bullish for gold.
However, market watchers have not given up on the precious metal. Eventually, Flynn said, the rise in the stock market may be bullish for gold.
“The improving economy against a backdrop of a lot of stimuli is going to increase the possibility for inflation,” Flynn said. “That eventually will sink back into gold.”
Nedoss commented that a key will be whether August gold can hold around the $1,700 level and July silver can hold around the $18 level.
“We’re testing key points,” he said. “If gold can hold $1,700 and silver can hold $18, that’s very positive for the metals markets. That [recent price decline] would be construed as profit-taking more than anything else in the bigger picture.”
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