The Dollar Tolls Again For Gold

As we have noted many times, there is no fighting dollar strength (or weakness when it moves the other way). The dollar today is accounting for the great majority of gold's drop. But why is the dollar strong today on a day that otherwise seems as if business as usual is being conducted? 

 

First, there is is disruption in the geopolitical world right next door to the U.S., in Canada. Regardless of where danger is in the world, investors always love the U.S. dollar, the most important haven these days. 

 

Second, it is now widely expected that the European Central Bank will begin a corporate bond purchasing campaign immediately after the first of the New Year, which will add liquidity to markets and, the Europeans are praying, ease the cycle of low or no inflation. (In September the inflation rate in the eurozone was 0.3%.) However, no confirmation has been forthcoming from the ECB. But, people are betting on the rumor.

 

Associated with the mess in Europe was a report by the Spanish news agency Efe that at least eleven european banks are going to fail a bank stress test once results of the assessment of strength is released. That's eleven out of 130, or almost 10% of the total "big" banks.

 

Third, physical demand is slipping after a bump up due to festivals in India and a recent revival in imports to China. The two countries account for about half of physical demand, mainly for jewelry and other decorative applications.

 

Fourth, China is slowing, and may be entering a period parallel - in relative terms - to the economic workings of Europe. 

 

The problem with the other big world economies - Europe, Japan and China - is the lack of an intensive consumer culture as we have here in the United States (a blessing and a curse). It is easy to see how part of the argument for those clamoring for a rise in wages in the U.S. see it as a way to boost the economy by putting more money in the hands of consumers.

 

But, we should take a look at the U.S. inflation rate when we are looking at Europe's. While the rate in America is slightly more robust, it's scarcely time to break out the WIN (Whip Inflation Now) buttons popular during Gerald Ford's administration (1974-77). Inflation is running well below Fed targets, making any interest rate rise unlikely in the U.S. 

 

Analyses that say part of the reason for the rising dollar today is the most recent U.S. inflation report are off base. Those gauges are saying that 1.7% inflation will prompt the Fed to raise rates sooner rather than later. Maybe the Fed will finally end QE3 at their next meeting, but rate hikes are way off on the horizon. 

 

And, from all probable accounts, the European quantitative easing will be about equal to the current heavily tapered U.S. bond-buying program that stands at about $15 billion per month, down from $85 billion per month not very long ago. 

 

Elsewhere, crude and Brent continued their decline, some analysts seeing $75 as the likely floor for crude. But, if the dollar keeps bulking up, crude could see 75 or lower in a matter of days.