One Part Dollar, One Part Sellers

Gold broke below its major support level at $1,238 today in reaction to the Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee. Gold futures (August Comex contract) closed dramatically lower settling at $1,227.50, losing $12.20, a net decline of almost a full percentage point.

Spot gold pricing lost $12.20 by 4:00 PM Eastern standard time and is currently fixed at $1,228 per ounce. On closer inspection, that decline can be broken into equal parts of dollar strength and selling pressure. According to the Kitco Gold Index (KGX), a strengthening U.S. dollar accounted for $6.10 of today’s decline, with the remaining $6.10 directly attributable to selling pressure.

Today’s decline is directly attributable to statements made by Jerome Powell.

The recently appointed Fed Chairman made it clear that their current monetary policy would remain intact and rate hikes would continue to be implemented on a regular basis. His statement underlined the Central Bank’s intent to continue to raise rates every three months.

The Central Bank will continue its policy of quantitative normalization that will also continue to reduce their massive balance sheet in conjunction with planned rate hikes.

On a technical basis, gold broke through the major support level that was created in December of last year when gold prices reached $1,238. This level will most likely become the new level of resistance.

Should gold prices continue to decline, the next real target will be based upon the lows achieved in March and July of last year which resided at around $1,200 per ounce.

The fundamental factors which have been the underlying force moving gold prices lower remain intact as the U.S. dollar continues to strengthen and move back towards the resistance level at 95 on the dollar index.

The U.S. dollar gained almost a half percent today and is currently fixed at 94.73. Recent data confirms that the economic outlook for the United States remains solid and robust. As long as the economy continues to run on all cylinders, we can expect the risk-on market sentiment to continue, as U.S. equities continue to be the recipient of that growth.

Wishing you as always, good trading,