Not Quite Volatile But Almost

Despite a helpful push from a lower U.S. dollar, today gold is struggling right around the 1202/1203 mark in late afternoon trading in New York. It’s not alone in its struggle.

All major worldwide equities markets are down – from modestly (the Nikkei) to substantially (Shanghai). The U.S. equities are off between 0.50% and 0.75%. Brent and West Texas Intermediate crude are up but they have had no outside bullish influence on gold prices.

We are seeing a round of very slow profit taking based on the expectation that the U.S. Federal Reserve will raise interest rates sooner, rather than later, although we feel as if June is much too early a date to count on – unless inflation spikes or unemployment tumbles drastically.

Some of the nervousness in the gold market is due to the release of U.S. non-farm payrolls on Friday. This is a fairly typical reaction to the data release, which will reflect February’s jobs picture. The most confusing outcome for gold traders would be for the number to come in right on target or slightly below. If the American economy shows growth but not at a breakneck speed, traders will be left wondering when a Fed rate rise may occur – and fabricating issues that will reinforce their own established inclinations.

Seven of the Fed's seventeen general members have stated they want the option of a rate rise in June put on the table, or have pushed in general for an earlier increase, expecting wages and inflation to turn higher.

That “vote” gives us a fair amount of distortion. There are ten voting members on the policy-setting FOMC. It is decidedly dovish. One member who flies a bit under radar, for instance, is Lael Brainard, a former Treasury Department official under presidents Clinton and Obama. Her particular field of interest is housing, and by most measures, housing is still struggling. So, you can take a guess as to where she comes down.

Thus, we count still 7 to 3 in favor of status-quo lower interest rates. On a push, we’d go to 6 to 4. But the margin doesn’t count. And, to swing the vote the other way requires the convincing of too many doves.

Indeed, in reality the U.S. is already experiencing an interest rate hike imposed by other major economies that have either lowered their rates or are engaging in quantitative easing. The rise of the dollar tells us, de facto, that is the case. Adding 25 basis points to U.S. rates would make the dollar rise even more and make gold experience more weakness.

For gold, though, there’s “trouble ahead, trouble behind.” U.S. rates staying the same will boost equities and make gold less attractive. The yellow precious metal can’t, on “normal” news, expand beyond its current range of 1190 to 1230 or 1240.

Today, the uncertainty described above resulted in a swing in gold prices that saw us go from a high of 1215 to a low of 1201. It’s not quite “volatility,” but we are approaching that state.

Wishing you as always, good trading,