Dollar Strength Continues to Weigh on Precious Metals Pricing

The precious metals complex is trading lower on the day, and with the exception of palladium, today’s lower pricing is a combination of selling pressure and a stronger dollar. The dollar index continues to strengthen, gaining over a third of a percent today, trading up 30 points and currently fixed at 91.65.

Dollar strength is an overwhelming contributing factor to lower precious metals pricing and is accounting for roughly 2/3 of the net decline in gold pricing today. Based on the KGX (Kitco Gold Index), spot gold is currently down $7.70, with $4.90 of today’s decline directly attributable to dollar strength, and the remaining $2.80 decline as a result of sellers bidding gold pricing lower.

As to whether the current dollar rally will continue, traders and market participants are looking at two critical events which will take place this week. Beginning tomorrow the Federal Reserve will convene on this month’s FOMC meeting, which will be followed by Friday’s jobs report from the U.S. Labor Department.

It is widely anticipated that the Federal Reserve will stay the course and leave the current Fed Funds rate unchanged. However, questions loom as to whether the Fed will continue its monetary policy tightening through its balance sheet reduction.

According to MarketWatch, “Fed officials, in a two-day meeting ending Wednesday, are expected to leave interest rates on hold and signal no change to a tightening path of two more rate hikes in 2018. There is no press conference or formal update to their economic forecasts at this meeting.”

During quantitative easing, the Federal Reserve’s balance sheet swelled to $4.5 trillion in assets. Now that the Fed is reversing course by raising interest rates and reducing their balance sheet, it must be noted that both actions effectively raise interest rates.

Each $200 billion reduction in the Fed’s balance sheet is equivalent to a 25-basis point interest rate hike. Whereas so much attention has been placed upon the “dot plot,” which lays out a timetable for the number of rate hikes this year, the balance sheet reduction continues to ramp up to higher and higher monthly reductions.

The Federal Reserve has raised the Federal Funds rate to 1.75%, with six rate hikes since December 2015. However, at the same time, there has been a consistent reduction of their balance sheet on a monthly basis.

These two events (FOMC meeting and the jobs report) will be the most critical components this month in terms of economic data influencing the financial markets.

Wishing you as always, good trading,