The Dollar Bully

The Dollar Bully 

The broad strength of the dollar today pushed gold down, all of the small loss coming off currency fluctuations. Silver was down as well, although dollar strength played little part in the gray metal's decline.

Economic data and sentiment drove equities higher and they dragged the dollar up with them. The S&P again set a record.

A much bigger expansion of manufacturing in the Fed's New York region survey helped propel equities, as did positive earnings reports from the banking sector. Tesla Motors reported it was shipping its first units of their Type S car to China and that sent that company's shares up.

On a more macro level, current gold prices appear to be completely discounting a smooth Fed exit from QE3, which, if rational analysis is applied, seems unlikely. The questions are: "Will interest rates have to rise higher and faster than now anticipated?" and, "Will equities money flow back to more lucrative developing markets should the U.S. recovery falter because of interest rates?" This is germane because, of course, any sense of volatility in broader markets will help gold. 

There is nothing concrete about these worries at the moment, but something we should keep our eye on.

We should also keep our eye on the run-up to elections in India, scheduled for later in 2014. We say the run-up because there are many politicians who will have their neck on the chopping block if something isn't done about the import tax on gold.

People are frustrated financially and they are truly angry over what they feel has been a government impingement on their traditions and the rights that go with the traditions. (Think of how Americans dealt with Prohibition during the 1920s.) 

Finally, crude oil, which often moves in tandem with gold, is up around 2% today. This does not weaken oil's connection to gold via currency movements, but rather reflects an oversold commodity that, as the world economy recovers, will be in ever greater demand. Continued instability in the Middle East also helped drive crude higher.