Gold Bullion Rallies

Gold bullion rallies in July

The monthly low for gold came on 10 July at US$1,204 per ounce. Gold then rallied to finish July at US$1,269.44 per ounce, a gain of US$27.89 (2.25%; YTD gold bullion has gained 10.17%). This was the third time this year that gold has successfully tested the US$1,200 level. Although the US dollar had a precipitous fall in July, it was not the primary driver for gold. Thus far in 2017 gold has been responding more to changes in real interest rates. Gold has an inverse correlation to real interest rates, which moved higher early in the month (coinciding with gold’s low) before trending lower. The change in direction for gold and interest rates was driven by Congressional testimony by Federal Reserve Chair Janet Yellen, which the market interpreted as an indication that another Fed rate increase this year is less likely.

Recent momentum suggests that $1,300 is likely to be tested

While US$1,200 has proven to be a resilient floor for gold, the price has yet to trend through the US$1,300 per ounce level. Twice this year gold turned down as it approached US$1,300. The recent upward price trend suggests US$1,300 may soon be tested for a third time. Gold prices typically trend higher in the fall as seasonal physical demand improves. In terms of identifying catalysts that might enable gold to break through US$1,300, the most obvious candidate is economic weakness that might persuade the Fed to take a more cautious stance. The Fed is expected to announce plans in September to reduce its massive crisis-era balance sheet and there could also be significant risks surrounding these plans.

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