You Say Good Buy, I Say Heck No

I say, "High," you say, "Low." You say, "Why?" And I say, "I don't know."  I don't know why you say, "Good buy," I say, "Heck no."

Satirized from Hello Goodbye by: John Lennon / Paul McCartney

You might say that what we are witnessing today in terms of gold pricing is like a salmon swimming upstream against the current. While there is some truth to that statement, it is a misnomer.

Yes, gold prices have moved substantially higher. However, they are trading lower on the day as a direct result of extreme dollar strength.

What we are witnessing is the purest example of a flight to quality, a move to safe-haven assets. Both the U.S. dollar and gold are safe-haven assets, and what we are truly witnessing is not a salmon swimming upstream, but rather two safe-haven assets gaining value with the U.S. dollar clearly reaping the majority of gains.

Today’s massive uptick in the U.S. dollar and respectable move in gold pricing is a result of the Turkish crisis. The economic crisis in Turkey has had a profound effect across multiple financial markets due to fears that the economic crisis in the country could spread to other economies.

U.S. equities are trading under pressure today with the Dow Jones Industrial Average currently down almost 200 points, with equal losses in both the S&P 500 and the NASDAQ composite. In fact, all three indexes are currently off by about 7/10 of a percent.

Although analysts correctly believe that if this crisis expands it would have a profound impact on gold pricing, the real question becomes will gains in gold be able to compensate for dollar strength in any real sense?

Obviously, gold has made a sizable move when paired against other foreign currencies such as the euro-dollar and British pound. However, for those that pair gold against dollars, it is an uphill battle at best, and at least for today, the U.S. dollar has come out on top.

The U.S. dollar index has gained almost 9/10 of a percent in trading today and is currently fixed at 96.18. At the same time, gold prices are trading fractionally lower, with gold futures presently trading off by $0.90 on the day and fixed at $1,219.

Physical gold is also trading lower on the day and is currently fixed at $1,211. This fractional decline is deceiving in that traders are solidly bidding up the precious yellow metal resulting in an increase of $7.50 in value. However, once you subtract $8.60, which is the change in gold pricing due to a strong U.S. dollar, the net change on physical gold is a decline of $1.10 today.

As long as the U.S. dollar continues to gain value, any gains in gold will be tempered by dollar strength, and as such could in fact trade sideways, fractionally higher, or even lower during this crisis.

Wishing you as always, good trading,