Interest yields, the dollar, and the Federal Reserve

There are three primary driving forces currently at play that have pressured gold prices lower. On a weekly chart, the prior four weeks have all resulted in a green candle (Friday’s close is above the opening on Monday), with higher closes when compared to the close of the prior week. That trend ended this week with the first instance of a lower close on a weekly chart compared to the preceding week. This week’s weekly candle also contained a lower high and a lower low when compared to the prior week.

One factor which has pressured gold lower has been dollar strength. Over the last three trading days, the dollar index has challenged its 50-day moving average. Today the closing price of the dollar index and the 50-day moving average are both at 92.65. Dollar strength peaked in the middle of August when on an intraday basis, the dollar traded to 93.745. That was followed by two weeks (10 trading days) which took the dollar index to 91.81 before recovering.

The recovery was short-lived, at least for now when on Wednesday the dollar traded to a high of 92.854 and then closed lower on Thursday. Today the dollar traded to a lower low than the last two previous trading days and as we mentioned, closed exactly at its 50-day moving average. Our technical studies indicate that there is resistance at 92.75, the 23.6% Fibonacci retracement, as well as Wednesday’s intraday high of 92.85.

Another factor that has placed significant pressure on gold has been rising yields in U.S. treasuries. Today all U.S. debt yields rose as a result of a report showing that the U.S. wholesale inflation index diminished slightly in August. Also, the U.S. producer price index data indicated an increase of 0.7% in August. However, it must be noted that inflationary pressures continue to remain high. Currently, the 10-year Treasury note is yielding 1.341%, up 0.041% today.

Lastly and possibly the most significant force pressuring gold prices recently is the upcoming FOMC meeting scheduled to begin on September 21. Today the Wall Street Journal reported that “Fed Officials Prepare for November Reduction in Bond Buying.” The article starts by stating, “Phasing out the Fed’s pandemic-era stimulus by the middle of 2022 could clear the path for an interest-rate increase.”

Federal Reserve members will attempt to come to a unified agreement regarding the timeline to begin to taper their asset purchases, as well as a designated dollar amount of the reduction of their monthly purchases now totaling $120 billion of U.S. Treasuries and mortgage-backed securities.

However, most analysts, including those in the Wall Street Journal, believe that tapering could be as early as November. Nick Timiraos, a reporter at the Wall Street Journal today, wrote, “Many of them have said in recent interviews and public statements that they could begin reducing, or tapering, their $120 billion in monthly purchases of Treasuries and mortgage-backed securities this year. While they are unlikely to do so at their meeting on Sept. 21-22, Fed Chairman Jerome Powell could use that gathering to signal they are likely to start the process at their following session, on Nov. 2-3.”

With just under two weeks before the Federal Reserve convenes for the September FOMC meeting, speculation will continue to guide the future direction of gold as well as U.S. equities. Of all of the issues which have pressured gold recently, the upcoming decision of the Federal Reserve seems to be the predominant factor guiding the assumptions made by analysts.

Wishing you, as always, good trading and good health,

Gary Wagner