Renewed Dollar Strength Creates Strong Headwinds for Gold

October 5, 2017 - 6:19pm

 by Gary Wagner

According to the Federal Reserve, the process is called quantitative normalization. This is a process by which the Fed reverses the actions and the net effect of the actions taken during the protracted period of quantitative easing.

These actions amount to a tightening of monetary policy. This is the exact opposite of actions taken by the Fed beginning in 2009 to effectively get America out of the deep recession which began during the financial crisis and meltdown of 2008.

The Fed dramatically lowered its Fed funds rate, the interest rates charged to banks to near zero, accomplishing a loosening monetary policy by greasing the wheels of commerce. This effectively allowed corporations to borrow vast sums of equity at nearly no cost.

At the same time, the Fed began one of the greatest and most significant shopping sprees of all time in which they accumulated roughly $4.5 trillion in mortgage-backed securities and treasury bonds. The Federal Reserve has presented the American citizens with its bill, as we all know there’s no such thing as a free lunch.

One of the direct results of these actions by the Fed is U.S. dollar strength. More so one of the direct results of a stronger U.S. dollar is the reciprocal, an equal downside pressure in any and all commodities traded in dollars.

It is this dollar strength that has been the underlying force moving gold pricing lower. After falling from 103 at the end of last year, the dollar index found tentative support at 91 during the first week of September, resulting in the dollar losing roughly 12% of value.

Today the dollar index has gained a little over a half a percent and is currently trading at 93.80. Throughout the month of September, the dollar gained roughly 3% in value.

At the same time, gold is trading $6.70 lower with spot gold fixed at $1267.90. A closer inspection shows only $0.45 of today’s decline is directly attributable to traders selling the precious yellow metal. The remaining $6.25 decline is entirely due to dollar strength.

As reported in MarketWatch, Adrienne Murphy, chief market analyst at AvaTrade said, “Gold’s bearish tones are largely due to the tightening of monetary policy. A rise in the cost of borrowing, as well as tackling the balance sheet, will put a huge strain on the price of the precious metal.

Additionally, investors are increasingly resilient to bearish news, leaving gold’s safe-haven status at the door, in favor of riskier assets as stock prices continue to swell.”

As long as market participants believe that the current monetary policy will continue to tighten and that the equity market will continue to have favorable results, expect to see headwinds limiting any upside move in gold.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

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Today's report will focus upon technical levels we expect gold prices to go to. That price point is $1265, the .618% retracement of the last rally. Also we will look at the current resistence level for the dollar, because the dollar will need to soften if we expect gold prices to go up.