The One-Two Punch, Strong Dollar and Profit Taking

After trading to a three-week high, gold prices closed solidly lower on the day. As of 4 o’clock Eastern Standard Time, gold futures are off by $10.10 (-.80%), trading at 1251. Major contributing factors cited for today’s decline are a strong U.S. dollar as well as profit taking.

Physical gold is currently trading off by $9.20. According to the Kitco Gold Index, this decline is due to a nearly equal combination of a strong dollar and market participant selling. A strong U.S. dollar is currently accounting for $5.05 (-0.40% of today’s decline, with the remaining $4.15 (-0.33%) due to regular trading and the selling of gold.

The Moving Averages

The key to analyzing today’s lower pricing is determining if any significant chart damage has been inflicted. To answer this question, we look at both the 50 and 200-day moving averages. With the current price of gold at $1251.00, that price point falls directly to the shorter 50-day moving average. The 200-day moving average is currently set at $1248.60. Based on this, it is safe to say that gold prices are at a pivotal point and near the 200-day moving average. But, unless prices break below the 200-day moving average, this recent price decline can still be seen as profit taking and not a key reversal.

Tomorrow’s Release of Fed Minutes

Tomorrow the Federal Reserve will release minutes from last month’s FOMC meeting. Market participants recently placed the probability of a rate hike at near 100%. This possibility has moved down a bit and is currently at 80%. Traders and analysts will look deeply into the minutes of last month’s meeting for indications and insights as to whether the Fed will implement a rate hike during the June FOMC meeting.

All things being equal, the likelihood of a rate hike is almost a certainty. The Fed has maintained an unmatched level of transparency. Recent statements by Fed members have suggested that the appropriate move at this point would be to raise interest rates. The Fed is currently on target for a total of three rate hikes this year.

However, there has been some talk about a fourth rate hike. More importantly, there has been talk about the balancing of Fed books through the liquidation of some of its assets. Commonly referred to as a “stealth” rate hike, asset liquidation by the Federal Reserve would have the same net effect as raising interest rates. By removing assets from inventory, there would be a dramatic decrease in supply. Based on supply and demand economics, a decrease in supply would lead to higher pricing due to an increase in demand.

Wishing you as always, good trading,