Gold Shows Resilience in Light of Dollar Strength as Investors Bid Gold Prices Higher

Gold’s Reaction to FOMC and US Dollar Influence

As of 4:20 PM, EDT gold futures basis most active June contract is fixed at $1878.80, up $10.00 or +0.54%. However, today’s price gains are a little deceiving because gold futures closed in New York at $1871 and did not factor in gains that occurred after the close.

After yesterday’s FOMC meeting concluded gold futures gained value and was trading at approximately $1883 by 6 PM EDT. So, while gold futures are currently up $10 when compared to yesterday’s close of $1868.80 in New York, it does not reflect the price gains that occurred immediately after.

That being said, another factor that muddies today’s gains in gold was extreme dollar strength and its effect on gold pricing. Gold futures are trading up 0.48% and concurrently, the dollar has gained almost a full percentage point in trading today. The dollar index is currently fixed at 103.585, up 0.99 points or 0.97%.

This means that because dollar strength was much greater than today’s gains in gold there was strong bullish market sentiment for the precious yellow metal bidding prices higher. Those gains were greatly muted by dollar strength.

The effect of dollar strength is most evident when we look at the price change of spot gold today vis-à-vis the Kitco Gold Index (KGX). The screen-print of the KGX was taken at 4:07 PM EDT, and spot gold was fixed at $1878.20 which is a net decline of $4.10 today. On closer inspection dollar strength resulted in a price decline of $18.25 per ounce, and normal trading bid gold prices higher by $14.15 resulting in today’s net decline of $4.10.

Sentiment Change During the Day

Except for gold, almost every asset class experienced strong key reversals from yesterday to today. Yesterday U.S. equities closed higher after posting exceptionally strong gains. The S&P 500 gained just under 3% which was the largest daily gain in two years. 95% of stocks contained in that index gained value yesterday. Today the S&P 500 lost 3.56%, with over 95% of the stocks contained in that index losing value.

Both the Dow Jones Industrial Average and NASDAQ Composite indices experienced the same type of price reversals with strong price gains yesterday followed by strong price declines today.

This extreme price volatility was also evident in the U.S. dollar as well as U.S. Treasuries and bonds. The dollar index had a significant decline of just under 1% yesterday which was followed by today’s gains of 0.96%. Today yields on the 10-year Treasury Note had significant advances with its yield currently at 3.043%. The yield on 30-year Treasury bonds rose 17 basis points yielding 3.176%.

Conclusion

The extreme price reversals seen in stocks, the dollar, and yields on U.S. Treasuries reflect a major knee-jerk reaction as market participants reviewed and re-examined the long-term potential of a tightening monetary policy by the Federal Reserve. The major takeaways announced yesterday were not so much the interest rate hike of ½ % but that it could be followed by a couple (two or three) of ½% rate hikes initiated at the remaining FOMC meetings this year.

When coupled with the Fed’s announcement of their plans to reduce the assets in their balance sheet, which can have the same effect as interest rate hikes, it forced investors to reverse market sentiment in almost all asset classes except for gold.

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Wishing you as always good trading,

Gary S. Wagner