Gold rally continues but recent gains are based on dollar weakness

Gold prices continue to advance trading to a new record close today with one notable exception: gains over the last two days have been primarily driven by dollar weakness rather than buying.

Today Chairman Powell concluded his two-day semiannual testimony to both the House (yesterday) and the Senate. Although the chairman continued to keep the timing of the first rate cut close to his chest, he offered subtle references to the Senate today alluding to the fact that, “I think were in the right place” about the timing of the first rate cut as the Fed readies itself to pivot its monetary policy from restrictive to accommodative. This will be accomplished by the Fed cutting its benchmark interest rate for the first time since raising them starting back in March 2022.

The Chairman said that inflation is “not far” from where it needs to be for the central bank to initiate its first rate cut. Which is more information than he offered in his testimony yesterday to the House Financial Services Committee. In his remarks today to the Senate Banking Committee, Powell subtly suggested that interest rate cuts may not be too far off if inflation signals cooperate.

When asked to respond to rate cuts and inflation, his answer to the Senate was, "We're waiting to become more confident that inflation is moving sustainably at 2%. When we do get that confidence, and we're not far from it, it'll be appropriate to begin to dial back the level of restriction,"

The key takeaway from Powell’s testimony today was that the leader of the central bank still did not provide any precise timetable as to when the Fed believes they will pivot and initiate their first rate cut. The only veiled reference to the timing of the first rate cut today came in a statement, in which he said that interest rate easing could be coming soon. 

Gold has now risen for the seventh consecutive day marked by higher highs, higher lows, and higher closes, with one notable exception over the last two trading days. During the first five trading days of this rally gains in gold were primarily driven by market participants with neither dollar strength nor weakness having a notable influence on the net change in gold. However, over the last two days, the rise in gold prices has been primarily driven by dollar weakness. 

Yesterday dollar weakness accounted for a little less than half of the net gain, and today dollar weakness accounted for all of gold’s gains.

As of 5:00 PM ET, the dollar is in its second day of strong declines. Today the dollar is down 0.53% taking the index to 102.77. When compared to gains in gold futures which gained 0.5% it is easy to derive the fact that today’s gains were 100% the net result of dollar weakness because the dollar declined slightly more than gold gained.

Currently, the most active April contract of gold futures is fixed at $2167.40 up $10.70 (+0.50%). While gold continues to drive to new record pricing, the most notable aspect of gains over the last two days is that gold’s gains over the last two days are based on dollar weakness rather than speculative buying. This is a notable change from what occurred during the first five days of gold’s current price advance. 

Wishing you as always good trading,