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$320 Billion Budget Deal Yields Stronger Dollar, But for How Long

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Gold futures have been trading lower ever since prices reached an apex last week when on Friday, July 12 the most active August contract traded to a high of $1454.40. Even during the trading session on Friday gold closed well off of that high and close at approximately $1428 per ounce. Yesterday gold traded in a narrow and defined trading range of approximately eight dollars and closed fractionally lower on the day.

Today U.S. dollar strength in tandem with mild selling pressure took gold pricing lower the precious yellow metal traded to an intraday low of $1414.60, and they recovered slightly. While dollar strength is attributed to yesterday’s budget deal, the new budget which allows the government to borrow could in fact take the US dollar as the costs of this growing deficit became more evident.

As of 4:45 PM EDT August futures are currently fixed at $1418.10 which is a net decline of $8.80 (0.62%). Today’s lower pricing is highly attributable to dollar strength. The U.S. dollar index gained approximately 0.50%, and is currently fixed at 97.42. Which means that only 0.12% of today’s 0.62% is attributable to direct selling pressure and bearish market sentiment. Nonetheless it is quite probable that after gold’s dynamic rally we are entering a period of consolidation and correction.

The same can be seen in physical or spot gold which is currently fixed at $1415.90. According to the (KGX Kitco Gold Index) today’s decline of $8.10 is composed primarily of dollar strength which accounts for $6.55 of today’s decline, with the remaining $1.55 directly attributable bearish market sentiment and selling pressure.

On a technical basis gold pricing could continue to trade lower. The key support levels to watch our $1400, a key psychological level. Major price support can be found at $1393 to $1384.50, a .38% retracement of this last rally. The major support level is based on a Fibonacci retracement from a data set beginning in June, when gold pricing was just around $1290 per ounce. The rally from June up until last week resulted in $162 gain in value. The 50% retracement is at $1366, and the .618% retracement is at $1349. Gold could trade as low as $1350 if it had a deep correction from last week’s prices. However, it is more likely that this retracement will not go below $1385.

Today’s dollar strength can be attributed to a budget agreement which was reached yesterday. This agreement will avoid another Washington shutdown and allow the government to borrow again.

According to MarketWatch, “President Donald Trump and congressional leaders announced Monday they had struck a critical debt and budget agreement. The deal amounts to an against-the-odds victory for Washington pragmatists seeking to avoid politically dangerous tumult over the possibility of a government shutdown or first-ever federal default.”

This agreement contains intrinsic risks in that the budget deficit is approaching the $1 trillion level which carries tremendous costs. It requires the government to borrow a quarter of every dollar spent. At some point these expenditures and increased debt will have the opposite effect on the US dollar and could take it dramatically lower.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer