Risk-On, Tax Cut Talk, and a Strong Dollar

A combination of factors have resulted in dramatically lower pricing in both gold and silver today. As of 4 o’clock EDT, gold futures are trading off by $15.50, with the most active Decembers contract currently fixed at $1286.20. Spot gold is also trading sharply lower this morning, currently off by $10.60. Today’s decline in spot gold is a direct result of both selling as well as a stronger dollar. Selling amounts to around $-4.65, which when added to the $-5.95 due to a strong dollar, results in a current spot price of $1283.

Selling pressure began to ramp up yesterday, immediately following a speech made by the Federal Reserve’s chairwoman Janet Yellen, in which she conveyed a much more hawkish stance than in previous speeches or statements.

In essence, her comments expressed the high probability of one more interest rate hike this year, most likely in December. This will run in tandem with the Feds plans to begin their asset liquidation in a move towards quantitative normalization. Both actions by the Federal Reserve will raise interest rates, which is highly supportive of the U.S. dollar.

These actions underline and give credence to a more robust economic outlook. This is carried over into the global equities markets, which continues to add fuel to the risk-on market sentiment which is so prevalent in the minds of many market participants.

The U.S. dollar continues to strengthen, gaining a half percent the value today, with the dollar index now fixed at 93.25. Over the last four trading days, the dollar index has gained 2 ¼% in value.

Tax Cut Talk

Today President Donald Trump laid out his plan for substantial tax cuts. His statements, whether or not they are realistic and achievable, added support to an already strong U.S. dollar. His statements also provided continuing support for U.S. equities, which have been recipients of the optimism associated with the possibility of real tax reform. Much of the rise in equities since the inauguration of Donald Trump has been based upon an optimistic overview that has yet to be actualized into tax reform.

According to Reuters, “President Donald Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, offering to cut taxes for most Americans but prompting criticism that the plan favors the rich and companies and could add trillions of dollars to the deficit.”

It is the collective U.S. debt and current deficit which could balloon if this tax cut is implemented, and additional growth in the GDP is not a robust as some models predict. The fact of the matter is our U.S. national debt had just risen above $20 trillion when the house raised the debt ceiling earlier this month.

Wishing you as always, good trading,