After the Gold Rush

Now for the third consecutive week, gold and silver prices continue to trade dramatically lower. As of 3 o’clock Eastern Standard Time, gold futures are trading at $1216.50, which is a net loss of $10.60 (-0.86%) on the day. Silver futures are also trading lower, currently at $16.10, down almost $0.16 (-0.97%).

This current decline is attributable to multiple forces, including a risk-on environment, the lessening of global geopolitical concerns, a Federal Reserve that is expected to ratchet up interest rates, and the stronger U.S. dollar, which is the byproduct of the potential interest rate hike.

Geopolitical Uncertainties Subside

This last rally in the precious metals markets was partially attributable to global concerns and their possible outcomes. Concerns related to geopolitical hotspots such as Syria and North Korea have, at least for the moment, subsided. This weekend’s election in France alleviated concern that Marine Le Pen and her nationalistic policy would win. The net effect of these uncertainties being subdued is a risk-on environment in which global equities are thriving.

Another Day, Another New Record High

Not to sound like a broken record (pun intended), but today the NASDAQ Composite Index is on track to close at a new all-time record high. This occurrence, in conjunction with strong global equities, has created a very strong risk-on environment that has contributed to weakening safe haven assets such as gold and silver.

Fed Expectations and the U.S. Dollar

The most recent statement released at the conclusion of this month’s FOMC meeting bolstered the belief that the Fed is on track for a total of three rate hikes this year, with the next one most likely occurring in June. Add to this the real probability that the Federal Reserve, for the first time, will begin to liquidate part of its assets. This liquidation, commonly referred to as a “stealth rate hike,” would, as the name implies, have the net effect of an interest rate hike.

According to MarketWatch, “Investors have been increasingly pricing in a U.S. rate increase next month, with fed-funds futures recently showing that markets are pricing in an 88% chance of a rate increase at the Fed’s mid-June meeting, according to CME data. Higher rates can make precious metals, which don’t offer a yield, less appealing.”

Any one of these various outside forces would certainly result in selling pressure in safe haven assets such as gold and silver. However, the combination of these three outside factors has placed tremendous downside pressure on the precious metals complex.

Gold prices had gained roughly $173 this year as they moved from 1124 to this year’s high of 1297. Today’s intraday low of 1214 took gold prices within four dollars of a 50% retracement of that rally. Moreover, as of 3:45 Eastern Standard Time, gold has trimmed the intraday losses and is now trading down $6.30 at $1220.80.

Wishing you as always, good trading,