Strong decline in gold as economic data moves the Feds policy more hawkish
Over the last few weeks, there has been a pivot in market sentiment for gold moving it from bullish to bearish. On Tuesday, May 16 gold futures basis the most active June contract opened at approximately $2020 per ounce. Today gold futures traded to a low of $1954.40. The nearly $70 drop resulting from selling pressure on Tuesday and today is significant in that it has created strong chart damage revealing a shift from bullish to bearish sentiment. Yesterday gold futures traded and closed below the 50-day simple moving average. A strong technical indicator reveals that the short-term bullish momentum in gold has waned and could signal more downside pressure in the price of gold.
This recent pivot results from comments by Federal Reserve officials indicating a more hawkish monetary policy than previously believed or anticipated. Yesterday Austen Goolsbee President of the Federal Reserve Bank of Chicago said it was, “far too premature to be talking about rate cuts”. Other Fed officials came out in favor of a more hawkish monetary policy such as Loretta Mester, President of the Cleveland Federal Bank who said, “rates were not yet at a point where it could hold steady.”
Recent economic data reveals a robust economy in the United States that is continuing to recover from the pandemic recession. Proof of that began last week when the new U.S. jobless claims came in well under expectations along with the Philadelphia Fed Manufacturing index in the U.S. which fell from -23.2 points in March to -31.3 points in April. This is the lowest number since May 2020. It also marks eight consecutive negative readings coming in well below expectations that predicted -19.2.
Statements by Federal Reserve officials combined with recent solid economic data have dramatically influenced the probability of what the Federal Reserve will announce at the next FOMC meeting which will begin on June 24. Currently, the benchmark rate of the Federal Reserve is between 5 and 5 ¼%. The probability that the Federal Reserve will pause rate hikes next month has dramatically decreased from 89.3% one week ago, and 58.6% today. The probability that the Federal Reserve may raise rates by ¼% has risen from 10.7% last week to 41.4% today.
These factors were highly supportive of the dollar with the dollar gaining just shy of 3% since May 4. On May 4 the dollar index traded to a low of 100.50 and is currently fixed at 103.42 after trading to an intraday high today of 103.65. Because gold is paired against the dollar there is a negative correlation which means that dollar strength by definition will take gold prices lower. As of 5:37 PM EDT Gold futures basis the most active June contract is currently fixed at $1960.30 After factoring in today’s decline of $24.60 Or 1.23%.
Wishing you as always good trading,
Gary S. Wagner - Executive Producer