Dollar Strength Caps Upside Move in Gold

As of 3:20 PM Eastern standard time, gold futures are trading under substantial pressure. The most active December Comex contract is currently down $11.50 and fixed at $1,191.80. As in previous instances where gold has traded to lower pricing, it is the U.S. dollar that is a significant contributor to that falling price.

The dollar index is currently trading up 0.56%, which is a net gain of .534 points. The index has moved back above 95, to be fixed at 95.585 currently. Gold is currently down approximately 1% on the day, meaning that dollar strength has contributed to approximately 0.60%, with selling pressure from traders contributing the other 0.40% of today’s 1% decline.

Yesterday the Federal Reserve released minutes from the early August FOMC meeting. The minutes revealed a high likelihood that September’s meeting will result in the third rate hike this year. The CME’s FedWatch tool currently predicts that there is a 96% probability that the Fed will raise Fed funds rates in September. The minutes also revealed that there is a high likelihood that the Federal Reserve will change the language describing their monetary policy from “accommodative” to “neutral.”

They also indicated that the current trade disputes are a wildcard that could change the timing of rate hikes, with the possibility that they would temporarily halt any rate hikes if the trade disputes develop into a full-blown trade war.

This morning the United States and China took the current trade dispute to yet another new level. Both countries placed a 25% tariff on approximately $16 billion of goods.

In an interview with MarketWatch, Rob Haworth, senior investment strategist at U.S. Bank, said, “Gold initially interpreted the FOMC minutes as somewhat dovish, likely relying upon statements that the Fed could incorporate concerns about trade issues into their forward view. However, the minutes clearly pointed to continued rate increases and a constructive view on the economy,”

Clearly, it has been rising interest rates that have been the underlying factor strengthening the dollar, and it has been dollar strength that is contributing to recent weakness in gold pricing.

Although the dollar has gained 3.6% this year, when we use the lows in February, at which time the dollar was at 88 to its current value, the reality is that the index has gained over 7%.

As long as the Fed normalizes its monetary policy by raising interest rates, we can expect gold pricing to trade under pressure as a direct result of that action.

Editors Note: Because of the threat of hurricane damage and power outages here in Hononlulu, we might not be able to produce a show on Friday. 

Wishing you as always, good trading,