Gold continues to drift lower as next week’s FOMC supports dollar strength

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Approximately two-thirds of today’s price decline in gold futures can be directly attributed to dollar strength. The dollar index continues its strong price advance gaining 0.66% in trading today, while June 2022 gold futures declined by 0.95%. Based on the percentage gain in the dollar and loss in gold it is clear that today’s decline in gold was the combination of dollar strength and well as selling pressure. As of 4:08 PM, EDT June 2022 gold futures are currently fixed at $1886.10 which is a decline of $18.10 or 0.95%.

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The recent surge in the U.S. dollar has been the byproduct of anticipated interest rate hikes as well as a balance sheet reduction by the Federal Reserve. Next week the Federal Reserve will hold its May 2022 FOMC meeting. A vast majority of economic analysts and investors are convinced that the Federal Reserve will make good on its recent statements to pivot to an extremely aggressive monetary policy by initiating two concurrent ½% rate hikes in both May and June.

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According to the CME’s FedWatch tool, there is a 96.5% probability that the Federal Reserve will raise its Fed funds rate by ½% in May and a 77.9% probability that the Fed will raise its Fed funds rate by ½% in June.

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Unquestionably the Federal Reserve is playing catch-up in an attempt to curtail inflationary pressures from continuing to rise. However, it is extremely unlikely that the Fed can effectively contain inflation from moving to higher levels. The primary component of rising inflation has been supply-chain bottlenecks that have resulted in the current level of inflation of 8.5%, based on the most recent Consumer Price Index report for March.

The Fed’s preferred index is the PCE, which strips out changes in food and energy costs. Currently, the latest numbers are for February in which the BEA (Bureau of Economic Analysis) reported that the inflation rate for February was at 6.4% month over month.

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Two extremely important reports will be released by the BEA this week. Tomorrow the BEA will release an advance estimate of the first quarter of 2022 GDP it is expected to indicate a sharp decline in GDP growth. The Federal Reserve Bank of Atlanta today released estimates for GDP during the first quarter of 2022, which forecast a decline in GDP to around 1%. The levels of inflation for March will be released via the PCE by the BEA this Friday, April 29. These two reports will most certainly be underlying forces affecting upcoming changes in both the dollar and gold.

Wishing you as always good trading,

Gary S. Wagner - Executive Producer