Dollar Weakness Continues to be a Friend of Gold

U.S. dollar weakness provided a robust tailwind today, moving gold to higher pricing. After four days of higher value, the U.S. dollar came under pressure, trading off by half of a percent to settle at 95.58 (-0.49 points). Since trading to a high just below 104 on the dollar index earlier this year, the dollar has been under pressure, which has resulted in losing roughly 9% of value over the last six months.

Although gold is trading higher on the day, there can be no doubt that recent selling has placed enormous pressure as prices broke through critical support levels.  Much of that selling is a result of a shift in market sentiment as the Federal Reserve and the European Central Bank unwind their respective multiyear quantitative easing programs.

Yesterday the Fed released minutes from last month’s FOMC meeting. One of the biggest revelations from those minutes was the possibility that the Fed would begin to reduce its massive stockpile of mortgage-backed securities treasury bonds as early as September of this year. The minutes also revealed that the Federal Reserve still sees one more interest rate hike occurring in 2017.

Kinks Emerge in Fed’s Armor

The minutes from last month’s FOMC meeting also clearly illustrated that there are major divides among the Fed committee and these divisions exist on multiple levels. There are clear and deep divisions as to the defined mechanics and timeline of their asset liquidation program well as the timing of the final interest rate hike for 2017.

The greatest divide revolves around the unwinding of a 4.5 trillion-dollar balance sheet. This liquidation will be an event which has never before occurred and as such intrinsically contains the greatest uncertainty regarding the net effect on our economy.

As reported in MarketWatch, Luke Bartholomew, investment strategist at Aberdeen Asset Management Investment said, “The Fed is divided over the timing of the balance sheet run down and why inflation is where it is. These were the two big areas that investors wanted insight into and they’re going to be none the wiser.”

There are deep divisions amongst Fed committee members and uncertainty about whether the ECB will abandon its file to accelerate quantitative easing. However, the fact remains that market participants are anxious and apprehensive as to the net effect of unwinding these massive monetary stimulus programs.

Wishing you as always, good trading,