Straight Talk About Gold

Say what you will about the underlying causes moving gold lower or higher, but the bottom line and the real truth is that dollar weakness or dollar strength is an unremovable component of gold pricing, not an outside market

While it is an entirely fair statement to say that there are external markets that are influencing gold prices, one of the most significant factors both during the last rally as well as well as this current correction has been dollar weakness and then dollar strength.

The U.S. dollar began to tumble in mid-December of last year, with the precise highest point the dollar reached occurring on December 11, 2017.  Dollar weakness continued until the last week of January. The net result was that the U.S. dollar went from 94 on the dollar index to a low just above 88. In other words, the dollar lost roughly 6%.

During that same period, gold prices gained roughly 10%. So, the real net change in gold pricing was a gain of 4% when you remove the dollar from the equation.

Since gold is paired or traded against U.S. dollars, obviously there is an exact and reciprocal negative correlation between the two. It is also a truthful statement that a move in gold prices contains two primary elements: dollar strength or weakness, and whether traders are buying or selling gold.

Therefore, the real question becomes what percentage of a daily price change in gold is due to dollar’s strength or weakness, and what percentages due to traders buying or selling the precious yellow metal.

Today, for example, the downside move is entirely dominated by dollar strength. This can be fully seen by looking at the Kitco Gold Index which takes current gold pricing and breaks it down into those two core elements that affect gold pricing.

As of 3:51 PM EST Spot gold is currently trading down $8.20 on the day and presently fixed at $1315.30 per ounce. Of the $8.20 drawdown traders are actually bidding up gold pricing by $1.30. However, U.S. dollar strength has taken away $9.50 in value, which accounts for all of today’s lower pricing in gold and then some.

When gold prices fell dramatically during the stock market meltdown on Friday, a significant component of the price decline was selling of gold, which accounted for $9.50 of the $17 decline. The remaining $7.40 were directly due to a strong U.S. dollar.

On Monday of this week when the equities markets had its tremendous meltdown with the Dow losing 600+ points on the day after trading 1600 points lower intraday, gold gained $5.40. In this instance, traders bid up gold pricing by $11.65, and dollar strength took away $6.25.

Yesterday’s price decline of $18.70 was all about traders selling gold with dollar strength accounting for $1.30, and the remaining $17.40 due to selling.

In other words, gold prices are obviously influenced by outside markets. However, to say that the U.S. dollar is one of them is a misnomer. As long as gold is paired or traded against U.S. dollars I find it hard to categorize the dollar as an outside influence on gold. Instead, it is an integral component of how gold pricing is composed.

Wishing you as always, good trading,