Growing Economic Concerns Overseas Are Moving Yields Higher

Higher Yields Bolster Dollar, Driving Gold and Silver Prices Lower

Not sprouting from within the U.S. but rather overseas, deep concerns regarding the economic slowdown in China and the eurozone have resulted in a sizable jump in yields of global bonds. Higher yields strengthened the dollar which in turn moved both gold and silver pricing lower. This is because the precious metals are paired against the dollar.

The dollar continues to play the role of a global haven asset as it trades to a two-month high against the other currencies that the dollar is paired against in the dollar index. As of 4:30 PM EDT, gold futures basis the most active December contract is fixed at $1951.10 after factoring in today’s decline of $15.10 or -0.77%. Silver futures basis the most active December contract have experienced an even stronger decline currently down $0.69 or – 2.81% taking the precious white metal to $23.85. The dollar has gained 0.67% taking the index to 104.394.

With the dollar up 0.67% and gold futures down 0.77% simple math indicates that the vast majority of today’s selloff in gold is related directly to dollar strength and 0.1% is the result of market participants bidding gold prices lower. However, in the case of silver, the vast majority (2%) of today’s decline of 2.77% can be attributed to market participants aggressively selling silver futures.

Gold’s Outlook Amidst Eurozone and China Economic Contractions, Fed’s Shift, and Government Spending Concerns

Data suggest that both the eurozone and China have entered a period of economic contraction that is evident in the latest data.

According to Reuters, “China’s services activity expanded at the slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the world’s second-largest economy and stimulus failed to meaningfully revive consumption.” Reuters also reported about economic concerns in the eurozone saying, “The decline in eurozone business activity accelerated faster than initially thought last month as the bloc’s dominant services industry fell into contraction, according to a survey which suggests the bloc could drop into recession.”

Fundamental support for gold is evident in recent statements by a prominent member of the Fed, Federal Reserve Governor Christopher Waller. Waller has been one of the more hawkish Fed members and is now suggesting a much more accommodative tone. In a recent interview, it is evident that he has softened his resolve regarding upcoming rate hikes. In an interview that aired today on CNBC, he said, “There is nothing that is saying we need to do anything imminent, anytime soon, so we can just sit there [and] wait for the data.”

According to the CME’s FedWatch tool, there is a 93% probability that the Federal Reserve will not initiate a rate hike at the next FOMC meeting set to be held on September 20.

Lastly, legislation is essential to avoid a government shutdown on September 30 if Congress fails to pass additional spending legislation. Although the White House supports a stopgap measure the devil is in the details. There once again is a deep chasm between the Republican and Democratic leadership resulting in a severely divided Congress that must agree on spending legislation.

A more accommodative Federal Reserve and the potential for a failure to pass spending legislation by the end of this month could be supportive of gold pricing in the upcoming weeks.

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Wishing you as always good trading,

Gary S. Wagner