Follow the Money
The catchphrase “follow the money,” popularized by the 1976 film All the Presidents Men, suggested that if you’re looking for a motive behind an event, you simply need to follow the money. In the case of recent price declines in gold, the more appropriate catchphrase would be to “follow the dollar,” or more appropriately, follow the dollar index.
The dollar index is the best measure of the value of the U.S. dollar relative to a basket of foreign currencies. The basket contains six foreign currencies but is weighed heavily with just two of those: the euro-dollar accounting for almost 58%, and the Japanese yen accounting for 14%.
In mid-February, the dollar index hit a low of 88.18. Today the dollar traded to a high of 93.25 for the first time since December 20 of last year. In other words, in just under three months the dollar index has gained a little over 5% in value.
During that same time, gold pricing traded from a high of $1,363 on February 16 to its current price which is $1,313 per ounce. This price differential represents a decline of 3.8%.
The difference between recent dollar strength and gold’s decline in pricing is approximately 1.2%. This means that gold pricing based upon buying or selling has actually increased by a little over 1% in the last three months. In fact, dollar strength has not only erased any real gains but taken pricing dramatically lower.
Obviously the most critical element to gold pricing this year has been dollar strength, which is far outweighing any moves as a result of traders bidding the precious yellow metal lower or higher.
With relatively low inflation and a Federal Reserve that is now firmly entrenched in monetary policy of quantitative tightening, yields on 10-year treasury notes have risen dramatically this year, breaching 3%.
In an interview with BusinessDay, Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen said, in reference to President Trumps announcement to pull out of the Iran accord, “The fact that the cat is out of the bag and we have the announcement [on Iran] has removed some of the geopolitical support for gold. The market, instead, has returned focus on the two key drivers for gold, which are bond yields and the dollar, and both are pointing the wrong direction from a higher gold perspective.”
The German proverb "Bäume wachsen nicht in den Himmel" is also appropriate when looking at recent dollar strength. Roughly translated it means “trees don’t grow to the sky,” suggesting that there are natural limits to growth. As such, at some point, we will see this current dollar rally subside and gold pricing benefiting from the decline.
Wishing you as always, good trading,