Marginal Buying Cannot Compete with Dollar Strength

If we just look at gold prices as reflected through buyers and sellers today, gold closed $3.70 higher on the day. Of course, precious metals pricing, including gold, is paired or traded against dollars so that any price change must reflect dollar strength or weakness and then be added to the current price of gold. Once we add dollar strength to today’s gold prices, the meager buying exhibited today was dwarfed by dollar strength. This decreased the value of an ounce of gold by $13.90. According to the Kitco Gold Index (KGX), spot gold as of 430 EDT is fixed at $1267 per ounce, a net decline of $10.20 on the day.

Inasmuch as it was dollar strength today that was the single greatest factor reflecting current pricing in both gold and silver, it was really all about the Eurodollar. Today’s dynamic upside spike in the U.S. dollar is actually a reflection of Eurodollar weakness.

Selling pressure in the Eurodollar today is a direct result of a monetary policy change announced by the European central bank. Simply put, they will be buying smaller monthly allotments of bonds. That is to say, they are tightening their current monetary stimulus (quantitative easing program).

According to Bloomberg News, “The European Central Bank will reduce its monthly bond purchases next year in a step toward ending a program that has spent more than 2 trillion euros ($2.4 trillion) trying to revive euro-area inflation.

Policymakers agreed to scale back buying to 30 billion euros a month starting in January and continue for nine months until the end of September, a decision that was in line with economists’ estimates. That’ll take its total holdings to at least 2.55 trillion euros.” Today’s announcement resulted in the euro losing -0.5% in value, fixing the current relationship at €1.1758 per U.S. dollar.

The U.S. dollar surged gaining over a full percentage point today (+1.06%) and closed .988 points higher to settle at 94.565. As reported by Reuters, “The dollar has risen in recent days on optimism about forthcoming federal tax cuts and speculation U.S. President Donald Trump would select someone to head the Fed who may want to raise interest rates at a faster pace than current Fed Chair Janet Yellen.

Trump has narrowed his search for Fed chief to Fed Governor Jerome Powell and Stanford University economist John Taylor, Politico reported on Thursday citing one source, while another counseled caution. Yellen, Trump's economic adviser Gary Cohn, and former Fed Governor Kevin Warsh are also under consideration for the post.”

As long as the Dollar continues to gain value, like a salmon swimming upstream, it will be difficult for gold traders to move the price higher.

Wishing you as always, good trading,