The return of dollar strength move’s gold off of its recent highs

As we have been focusing on for the last couple of weeks it has been dollar weakness that contributed a large portion of gains in gold. In essence the dollar index has lost approximately 5% over the last three weeks. However, the dollar gained strength today closing at 96.43. What was noteworthy about today’s move was the fact that the dollar sank to a low yesterday right around our .618% retracement at 94.69 and we talked about on our show how this would be a logical reversal point for the U.S. dollar after falling for 12 of the previous 13 days.

U.S. equities also showed a very impressive comeback today with the Dow gaining 4.89%, the Standard & Poor’s 500 and the NASDAQ composite both gaining 4.95%.

This strong and quick pivot or reversal occurred based upon the possibility that this current administration will enact a round of government stimulus as the Federal Reserve runs out of real tools to keep the economic growth on target even in the face of an epidemic.

It was the shift in focus from the safe haven asset class that has dramatically increased due to the government stimulus as trump announced plans on issuing cuts to federal payroll taxes which are proving much more effective than any tool the Fed has left in its toolbox. It is quite obvious that actions last week by the Federal Reserve announcing an emergency rate cut in between FOMC meetings, and recent dollar strength took the focus away from gold and back to the risk on asset class.

These price reversals are occurring when the concern for the coronavirus spreading globally continues to grow, and the acceptance of a vaccine widely accepted as being about one year away. Yet at least for today that was information that traders and market participants chose not to focus upon. Another bewildering result of equities trading today was that this recovery occurred within one day of one of the sharpest selloffs and most volatile market conditions since the financial crisis of 2008.

Spot gold closed at $1649.30 after factoring in today’s decline of $30.70. Although some damage was due to normal trading that only amounted to $4.30 of today’s decline. The additional loss of $28.40 is directly attributed to dollar strength, this according to the KGX (the Kitco Gold Index).

When you create a retracement from to the highs achieved in February of this year when the Dow traded to 29,542 points to recent activity at 21,730 which occurred in December 2018 the former low. The Fibonacci retracement level of 61.8% occurs at 24,914 which could not provide support yesterday when the 2000-point drop took the index well below that price point at approximately 23,700 points.

It is because major decline in gold, silver, platinum and palladium was a direct result of dollar strength with very little selling adding into the mix, pricing over the next week or so will be intrinsically and closely tied to moves in the dollar index. For those who would like more information simply use this link.

Wishing you as always good trading,

Gary Wagner