Hawaii Six O - Gary Wagner
Free Falling Gold
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Featuring views and opinions written by market professionals, not staff journalists.
Gold has been under major pressure and losing value since April of this year when the precious yellow metal traded to the highest value this year and began to sell off. Since that time, you could say that gold prices have been freefalling.
Since January of this year, gold has attempted to breach the highs achieved in September 2017 unsuccessfully on three occasions. However, during this last selloff, the decline in gold prices have been more than 10%, which puts this current market decline officially in a correction.
The correction has taken prices from a high of $1,370 to today’s intraday low which was $1,210.70 (August Comex contract), a decline of approximately $160.
The majority of this recent price decline in gold can be directly attributed to a strengthening U.S. dollar. Since January of this year the dollar index has gained almost 7% in value.
Because we pair gold against the dollar, the 7% gain in dollar strength correlates with precisely the same percentage decline in gold. The remaining 3% of the price declines in gold prices are attributable to selling pressure in the market.
The One-Two Punch of the Fed
Most recently, statements made by Fed Chairman Jerome Powell indicated a more hawkish stance as the Central Bank continues its monetary policy of quantitative normalization. His most recent testimony suggested that they would implement a total of four rate hikes this year and continue to raise interest rates every three months after that.
At the same time, the Fed has quietly been reducing its massive balance sheet which swelled to over $4.5 trillion in assets by September 2017. Then in October 2017, the Federal Reserve began its liquidation by initially allowing 6 billion in Treasuries and 4 billion of mortgage-backed securities to mature every month without reinvesting the principal. It is widely expected the Central Bank will shrink its balance sheet to $3.7 trillion in assets by the first half of 2020.
Trump Talk Tempers Gold Price Decline
Although gold prices are at their lowest point this year, today’s selloff was tempered by statements made by President Trump in an interview with CNBC. He expressed his dissatisfaction with recent Central Bank actions saying that he is “not thrilled” with rising interest rates. “I don’t like all of this work that we’re putting into the economy, and then I see rates going up.”
As of 4:30 PM Eastern standard time, gold futures are well off of their lows, currently trading down by $4.70 and fixed at $1,223.20. However, the independence of the Federal Reserve is unquestionable and written in stone.
As such we would not expect the Fed to deviate in any way from their current monetary policy based on his statement by the president of the United States. Therefore it is more likely that the Fed will stay the course and we will continue to see the U.S. dollar gaining strength pressuring gold to lower pricing.
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Wishing you as always, good trading,