Dollar weakness erases gold’s losses resulting in modest gains

As of 5:44 PM EDT gold futures basis, the most active August 2022 contract is fixed at $1707 after factoring in today’s gain of $3.40 or 0.20%. At the same time, the dollar gave up 0.57% and is fixed at 107.30. This means that gold had a fractional decline before factoring in the increase because of dollar weakness.

This can also be seen in spot gold pricing which is currently fixed at $1709.30. On closer inspection dollar weakness added $8.90 per ounce and traders bid the precious metal lower by $8.20 resulting in a net gain of $0.70. This is according to the Kitco Gold Index.

While dollar strength or weakness is intrinsically always a component of the net change in gold prices, recently it is been the predominant driver moving gold to lower pricing as the dollar moved to its highest value since 2002. Last week the dollar traded to a high of 109, well above a double top that occurred at approximately 104. 104 had been the highest trading value of the dollar index since the middle of 2002.

The dollar has been gaining substantial value since April of this year when it traded just below 90. From its low in April to last week’s high of 109 the index is gained 19% when weighed against the basket of currencies that the index is measured against.

On Thursday and Friday of last week, gold prices slipped briefly below $1700. Today gold traded to a low of $1704.40. However, it closed well above its high today of $1722.

Recent weakness in gold prices stemmed from dollar strength and recent dollar strength is a direct result of higher yields in US debt instruments making that asset group more attractive. Higher yields are based upon recent action by the Federal Reserve that has raised rates at the last three FOMC meetings in incrementally larger amounts. The Fed raised rates by 25 basis points in March, 50 basis points in May, and 75 basis points in June.

After last week’s CPI index report for June was released market participants began to factor in the possibility that the next rate hike during this month’s FOMC meeting ending in July 27could be as high as a full hundred basis points.

According to the CME’s FedWatch tool, there is a 69.1% probability that the Fed will raise rates by 75 basis points and a 30.9% probability that they will raise rates by hundred basis points.

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