Dollar Strength Erases Today’s Fractional Gains in Gold

Although market participants continued to buy both physical gold and gold futures, today’s gains were not enough to overcome dollar strength. As of 4:30 PM EDT the dollar index is currently fixed at 98.165 after factoring in the gain of 0.258 points (+0.26%). At the same time gold futures basis the most active December Comex contract is currently fixed at $1548.70 which is a net decline of $3.10 on the day, or -0.21%. When we calculate the moves in gold futures and the dollar, we can see that there was actually a fractional gain in gold futures. However, today’s modest gains were unable to overcome the dollar index which is now back above 98.

The same dollar/gold relationship can be seen in physical holdings. According to the KGX (Kitco Gold Index) spot gold declined $3.70 today and is currently fixed at $1538.80. On closer inspection normal trading resulted in neither gains or losses. However just as we witnessed in gold futures dollar strength decreased the value of spot gold by $3.70.

That being said this month market participants witnessed a tremendous price surge in gold which gained over $100 per ounce. Although there is still two days remaining before this month’s trading has concluded, it would take a significant decline to visibly erode the largest monthly gain since 2016.

The most significant factor which has been the root force moving prices dramatically higher since June of this year has been fallout from the trade war between the United States and China. The repercussions of the trade dispute between our two superpowers have had a profound impact on the global economy which has shown signs of contracting.

This contraction has led to lower equity prices globally. It has also shaped the monetary policy of many central banks worldwide causing them pivot to a more dovish stance in which they have lowered interest rates. In the case of the Federal Reserve the pivot was even more extreme, moving from a policy of quantitative normalization to quantitative easing. In fact, for the first time in many years the ten- and two-year U.S. Treasury yield has inverted.

According to Investopedia, “Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.”

While some analysts and economists have put this viewpoint into question the facts remain that a yield inversion is extremely rare, and since 1956 equities have peaked six times after the start of an inversion and the economy has fallen into a recession within 7 to 24 months following and inverted yield curve.

If history repeats this pattern it suggests that it will be highly likely that we could see equities hit an apex and begin to trade lower. Since both gold and silver tend to move higher during periods in which equities decline, we could see a continuation of the major rally which has been prevalent in the market since October of last year.

Wishing you as always, good trading,