Dollar Fizzle Props Up Gold

Gold is about $6 off its high for the day now in late afternoon trading. Any gain the yellow precious metal has seen for the day is due to a weaker dollar. In fact, without dollar weakness, gold would have been off by about a third of a point, instead of showing a substantial gain.

The lack of regular trading follow-through should be noted by gold bulls.

The real issue at hand is how the dollar will trade in the near term. Is the dollar rally over for the moment? Perhaps, but it will be rekindled in a few weeks when the next feeding frenzy over Federal Reserve rate hikes begins. (Next meeting is about 40 days in the future.) Fear will again ripple through the economy and analysts and investors who buy into the hawks’ arguments will rule once again.

We should also remember that the European Central Bank’s QE is not a one-month or two-month deal but a trillion-dollar effort, which will keep pressure on the Fed to not permit the “spread” between U.S. rates and European rates grow too large.

Yesterday and today, Fed members beat the drums for their respective positions on rate increases. We covered Charles Evans of the Chicago board’s position on Thursday. Today we turn to Atlanta Fed president Dennis Lockhart’s comments.

He expects a rate increase in June, July or September. "I continue to believe that mid-year or a little later is appropriate timing. That would allow the June meeting to clearly be taken seriously as a meeting for the 'lift-off' decision. I would add to that July. And, of course, September," Lockhart said. (Heck, why not throw in December and call it a year?)

However, we think there was a large hedge in his remarks that have garnered less media attention and illustrate that he is not exactly confident in his above statement. Thos second-level comments go this way: "The impact of the strong dollar first on softening the inflation numbers ... and its effect in the first quarter on manufacturing activity... has gotten the attention of me and, I believe, my colleagues," Lockhart said.

But the collective viewpoint of the Fed's policy-setting committee "continues to be one of above-trend growth in the medium-term... this is not reflecting a dramatic turn in the economy for the worse," he said.

From our vantage, given what Evans said yesterday, Yellen’s general tenor, Lael Brainard’s ingrained dovishness and both Dudley and Fischer’s comments, we don’t see where a majority of voters on the Federal Open Market Committee would come from.

Another dovish vote is likely to come out of John C. Williams, president of the San Francisco Fed, whose main concern is how we get monetary policy “back to normal.” Higher interest rates hang over the huge QE efforts from past years and could seriously impact the road to normalcy once the paper the Fed bought up is marketed out to the private financial world.

Equities markets are loving the weaker dollar, all three up strongly today. West Texas crude is also up – by $4.00. If you’d like to read other tealeaves, the bond yield was down again today and is now nicely below 2%. That should tell you where those traders think interest rates are going.

We’re not sure where hawkishness comes from at this moment. Perhaps ideology? The jobs situation in our view is tenuous. Inflation barely exists. What is even more complicating concerning the inflation portion of the Fed rate-rise equation is that expectations of inflation are falling dramatically. Why would that be? Wage growth has been stagnant for five years and that doesn’t seem to be about to change until we hit maybe 4.5% unemployment or even lower.

American workers of all income levels have this to say to the Fed – and Wall Street – show us the jobs, show us the money, and we’ll show you higher inflation.

Wishing you as always, good trading