Dollar Strength Curtails Rally in Gold

Buyers have been bidding up gold to higher values over the last two days, although you would never would that by looking at the net change in prices. Renewed and elevated concern over the trade dispute that is now being labeled as a trade war between the United States and China has continued to be highly supportive of the U.S. dollar.

Geopolitical concerns about Saudi Arabia, concerning the disappearance of an American resident, and concerns about the European Union as it deals with issues from both Italy and Turkey have also added to dollar strength. 

Over the last three days, investors have witnessed the dollar index moving from Tuesday’s low of 94.48 to today’s closing price of 95 68. The dollar index has gained about 1.2% in value over the last three trading days. On a technical basis, there is no real resistance in the U.S. dollar until 96.89, which are the highs achieved on August 15 of this year.

Dollar strength has resulted in a dynamic pressure on gold pricing because gold is paired with the US dollar. Yesterday, for example, market participants were able to bid spot gold prices higher resulting in a gain of $4.60. In reality, physical gold was actually $2.60 lower after factoring in dollar strength which took prices -$7.20.

Traders bid the precious yellow metal higher by $6.40 in trading today. However, gains were dramatically muted which resulted in gains of $2.90 after subtracting $3.50 as a result of dollar strength,

There has truly been a battle of sorts between the safe haven asset tendencies inherent in the U.S. dollar and gold. MarketWatch reported that Stephan Innes, Asia-Pacific head of trading at Oanda, wrote in an email update, “Given equity weakness, gold looks increasingly attractive as a defensive hedge, but with the [dollar] refusing to stay down for the count, markets could be torn between competing narratives over the near term, weaker equities vs. the stronger USD.”

While it is quite clear that gold has found some solid footing and is forming a base at current pricing, it is dollar strength that has absolutely limited the upside potential of gold prices as they both gain value. It will be difficult for gold to have any substantial gains as long as it is fighting the uphill battle of dollar strength.

Wishing you as always, good trading,