It Is All About Risk-On and a Stronger Dollar

The global equities rally moved into the United States this morning. Trading today resulted in record closes in the Dow, NASDAQ and Standard & Poor’s 500. The U.S. dollar also found underlying strength, gaining 6/10 of a percent on the day to settle at 92.43.

Since Friday, when gold prices traded to its highest level this year, we have seen moderate price declines in both gold and silver. As of 4 o’clock EDT, gold futures are trading at $1326.20, down $6.40 on the day for a net decline of almost half a percent. In fact, falling gold prices this week have resulted in a 38% decline of the most recent rally, which took gold pricing from $1257 an ounce to last week’s high at $1363.

It is obvious that gold prices, which were bid up throughout last week, were a direct result of concerns that North Korea would conduct another ICBM missile test on their national holiday, Founders Day. The premium that was factored into gold pricing leading up to the weekend quickly diminished once the weekend passed without a test.

As reported by MarketWatch, Craig Erlam, senior market analyst at Oanda, wrote, “Naturally there is still plenty of underlying geopolitical risk in the markets at the moment, even if acts of provocation have decreased and become less hostile, and this is likely to put a cap on risk rallies for now. The longer this period of calm continues, the more relaxed investors will become which will be better for riskier assets, while safe havens will continue to experience unwinding, Gold is a perfect example of this having come off its highs while remaining at elevated levels.”

With geopolitical concerns about North Korea put on the back burners, even if it’s only temporary, traders once again focused on the risk-on environment that has been fueling a global equities rally. Market sentiment continues to strongly favor equities as having the greatest potential return. This, coupled with the belief that the Fed will not raise interest rates again this year, has put dynamic pressure on risk-off assets, such as gold.

Even with the most recent price decline in gold, many analysts believe that this is a temporary lull in the action as the underlying issues which have fueled the most recent rally in gold have not abated, they have simply been put on pause.

Jeb Handwerger, the editor of GoldStockTrades.com, said, “All of the ingredients to break $1,400 are there—our debt is out of control, and our deficit could skyrocket, especially with infrastructure plus military spending on the back of a possible confrontation with North Korea. We could be maybe weeks away from that $1,400 breakout, which could signal a new uptrend in gold not seen in many years.”

We believe the current price decline in gold is a normal correction and to be expected given recent upside moves. But most importantly, our technical studies indicate that this correction will be followed by a dynamic rally, moving gold prices $100 higher immediately following the conclusion of this current selloff.

Wishing you as always, good trading,