Four Parts Selling, One Part Dollar

As of 430 EDT, physical gold is currently fixed at $1276.60, a net loss of $5.40 on the day. This price decline can be broken down into its components, which for today are four-parts selling and one-part dollar. The exact numbers, according to the Kitco Gold Index (KGX), show that today’s $5.40 decline is a combination of four dollars as a direct result of traders selling gold today, with the remaining $1.40 attributable to a strengthening US dollar.

It is the selling by market participants that illustrates how deeply the current risk-on environment, created by the U.S. equities markets, is continuing to rage and close at new record highs on a weekly basis.

As we have spoken about over the last couple of days, two key elements could dramatically affect gold pricing in the very near future. The first of which is who the president will appoint as the next head of the United States central bank and the Federal Reserve.

As reported in MarketWatch today, “U.S. President Donald Trump told reporters Monday that he is “very, very close” to making his decision on who should chair the Federal Reserve. A hawkish candidate would be expected to push for higher interest rates, boosting the value of the dollar and making the greenback-denominated metal more expensive for holders of other currencies.”

Of course, the reciprocal is also true, in that a dovish candidate would be expected to keep interest rates lower longer which would be bearish for the US dollar and therefore bullish for gold and silver.

The second critical issue that market participants are following is whether this current administration will be able to implement and execute a major tax cut. The optimism surrounding the potential success and implementation of a tax cut has already put major pressure on gold and silver pricing, as well as fueling the existing risk-on environment which has resulted in new record pricing for the stock market and its indices.

As reported by Myra Saefong and Rachel Koning-Beals, “The yellow metal also suffered its biggest weekly loss in a month last week as the dollar strengthened following the Republican-controlled Senate’s passage of a budget blueprint that’s seen helping to clear the way for the stock market-strengthening tax cuts promised by President Trump. More work on taxes is expected this week.”

It is these two key elements that gold traders and investors are watching closely. As far as the tax cut is concerned, the challenges to implement such a dramatic change given our current fiscal environment are extremely strong. Last week it was reported that our budget deficit has grown by $80 billion to $666 billion this year. Add to that the fact that entitlements, as they stand, will only advance the budget deficit, which makes it a perplexing puzzle that would allow the government to cut taxes while increasing the budget deficit.

Without the ability to create a budget-neutral tax cut, this author finds it difficult to fathom the implementation and execution of such legislation.

Wishing you as always, good trading,