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Dollar Rises On Rate Talk and Precious Metals Suffer

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The big news for traders today is that we ran into a plunge in gold and silver prices that caught most people off guard. The regular selling was based on the technical apprehension that gold failed to break through the $1300 mark Friday.

One might have believed that was a distinct possibility because of the weak U.S. jobs number. Alas, it did not occur.

Compounding gold’s problems was a rise in the U.S. dollar versus the euro and a very large rise against the yen.

The 1.25% rise against the yen was primarily due to an intervention “threat” by the Bank of Japan but it also was dependent on a stronger appetite for equities and other riskier investments. The yen is considered to be one of a small handful of safe haven currencies.

Gold also battled rising bond yields early on. That move has faded as the session has worn on but the sentiment remained alive.

We feel the worry of higher rates is coming from two sources. The first comes from between-meetings chatter by Fed officials, which, if you follow this commentary, you know we detest.

Today, President of the New York Fed, William Dudley, said that two rate hikes in 21016 remained a “reasonable expectation.”  In essence, he “talked the dollar up,” perhaps trying to accommodate the Japanese and thereby skirting an official intervention by one of the chief partners of the U.S.

The second source of worry for rate hikes is an informal probability graph. The Federal Open Market Committee holds eight meeting per year. When 2016 began, that means we had a one in four opportunities for two rate increases. But, with wavering data, those increases could be shunted to a siding as we rolled on down the tracks.

Now there are only five meetings left for the year. People like Dudley are still saying we could have two more hikes so that now the opportunity is down to two out of five. Granted, everyone says that rate hikes must be data dependent, but there will be more voices saying, “If not now, then when”?

Pressure, in other words, is building. Rates and fear of rate hikes and a rising dollar are important to gold traders.

Rising rates tend to weigh on precious metals because higher rates lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which gold is priced. As fear of rate hikes faded, gold rallied. Now that some individuals and the calendar itself are putting hikes back on the table, gold is necessarily pushed downward.

Yet today was not even close to a strong risk-on day for equities.

Sharply lower crude oil prices held down the Dow, keeping it in slightly negative territory at the 3PM turn in New York. The S&P 500 is up modestly, but also being restrained by the energy fiasco. NASDAQ issues were generally up on biotech and some stronger transport-controls news.

Europe was mixed, the German DAX acting as positive leader. Asia, too, was mixed, but Shanghai feel sharply on poor data out of China.

Overall, though, it was oil, especially Brent North Sea that began the tumbling of energy-specific stocks. It was down almost 3.90% at one point, forcing it almost into convergence with the price of West Texas Intermediate.

Both crude benchmarks are trading in the $43 range, well off the $46+ range found on May 5th, the high price for 2016.

Some of oil’s downward slide is attributable to analysts beginning to downplay the horrendous wildfire in Alberta, Canada. The stronger dollar contributed a negative bias, but the slide is also due to general market pressures on oil.

Demand is down. Supply is overabundant. Delivery systems are sophisticated. Alternative energy sources are impeding real growth.

In case you’re watching it, the VIX is down again today, reaching farther into stable territory. It was off by about 3.00%.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer