Gold Hurt By Dollar Strength As Indecision Haunts All Markets

It’s hard to label recent action in markets across the board as volatile. It is more a matter a sort of indecisive approach first by traders in equities, switching then to precious metals, then crude, then currencies, then bonds – round and round and round we go.

Different instruments, sectors and stocks have been operating independently rather than as a unified herd. Strength within groups of stocks has been rotating, as well.

U.S. equities were mixed. The Dow and S&P gained as the NASDAQ tumbled on further declines in Apple, which subsequently recovered. Apple probed the area below $90 per share but closed above the mark, dragging the NASDAQ index around with it.

Today, the Bank Of Japan again cried “Intervention” regarding the strength of the yen. The dollar jumped against the yen and euro, but not against the Swiss franc, which has taken over as the chief haven currency while the yen struggles to find its proper level.

Naturally, the strengthening dollar weighed on gold and the other precious metals. Independent of the dollar effect, regular trading took gold a bit lower, mostly on sell triggers and some mild profit taking.

Ironically, we believe there is “fear” in the gold markets because traders wonder what will happen when earnings season is over. Will equities resume their upward vault? We should also keep in mind that the first quarter of any year – not just this or last year – generally shows softness.

President Esther George of the Kansas City Fed said as much in prepared remarks today. “I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions,” she said in prepared remarks for a luncheon with business and community leaders in Albuquerque, New Mexico.

George is a voting member of the Federal Open Market Committee this year and is a stalwart rate hawk. She was the only dissenter in the March and April FOMC meetings, pushing for higher rates then.

Separately, Eric Rosengren, President of the Boston Fed, in spirit agreed with George’s sentiments. Speaking in Concord, NH, he said, “The market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data.”

Prices in fed funds futures imply markets do not expect a rate rise before December.

In the bond market today, the 10-year yield was up modestly to 1.75%, which in fact implies very little if anything. As a side-by-side comparison, the German 10-year yield is at 0.15%.

Crude oil is off its settlement high of 46.70, which in turn is off its 6-month high. There is some chatter about an improvement in the demand landscape and some speculation that Venezuela, Libya and Nigeria were being forced to cut back production for various reasons peculiar to each country.

There was a 550K-barrel build in reserves at the Cushing, (Oklahoma), stockpiles facilities. This happened in spite of the Alberta fire last week when 1 million bpd were off line.

Demand? Higher gasoline prices suppress demand. And we are entering the warm months when there is virtually no demand for heavy home oils except for that used to heat water.

We remain unconvinced of a longer-term rally in crude futures. Maybe $50 or $55 per barrel is possible but at that point, all hell breaks loose as the U.S. shale sector dives back into the market with a vengeance.

Let’s close out with volatility, which we opened today’s fundamentals overview.

The VIX measure of volatility is down about 3.40% at 3PM Eastern Time. It’s sitting at just over 14 on the index. That’s getting near the “very quiet zone” of market noise.

Wishing you as always, good trading,