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Gold Price Bounces As U.S. Dollar Shows Concern For Growing US Deficits

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(Kitco News) - The gold market is regaining some lost ground Tuesday, benefiting from a weaker U.S. dollar as markets continue to digest President Donald Trump’s proposed budget for 2019.

April gold futures last traded at $1,331 an ounce, up 0.35% on the day. The gains come as the U.S. Dollar index has dropped below the critical psychological level of 90 points. The USD Index last traded at 89.65 points, down 0.50% on the day.

Gold prices could have room to move higher in the near-term as some currency analysts adjust their expectations on the greenback. On Tuesday, currency analysts at RBC Capital Markets said they were exiting their short-term bullish U.S. dollar trade.

“On February 2 we recommended a tactical long position in the DXY,” the analysts said. “As recent evidence suggests that the short-term recovery that we were expecting is showing a loss of momentum before reaching our ultimate target at 91.00, we elect to close out our long position at 90.16 for a profit of 1.1%.”

Currency analysts at TD Securities said that they see the potential for further U.S. dollar weakness as markets digest the budget released by the Trump Administration, which proposes to spend $4.4 trillion over 10 years. While Trump’s budget has attracted market attention, political pundits have said that it is unlikely Congress will use this spending template.

Trump's budget comes after the he proposed an infrastructure spending bill that would cost $1.5 trillion over 10-years. The increase in spending also comes after Congress passed historic tax reform and cuts that is predicted to reduce government revenues by $1.5 trillion over 10-years.

“The re-emergence of the twin deficit should send shivers down the dollar's spine. The IMF has shown a 1% rise in the budget deficit is worth about a 0.6% increase in the current account deficit, suggesting a twin deficit in excess of 7% of GDP by the end of the decade,” TD said in the report. “Those numbers do not bode well for the greenback in the medium-term.”

Along with a weaker U.S. dollar, David Madden, market analyst at CMC Markets, said that weaker equity markets is also helping the yellow metal.

"The metal is often popular with investors when there is uncertainty in equities and that is feeding into golds push higher today. The commodity started to push higher in early December, and even though it lost ground last week, the upward trend is still intact," he said.

However, not all analysts are optimistic that gold can regain its momentum.

“While Dollar weakness could in the short term offer the yellow metal further support, gains are likely to be limited by rising expectations of higher US interest rates,” said Lukman Otunuga, research analyst at FXTM.

Technically, Otunuga said that gold has to push above $1,334 an ounce to regain its lost momentum.

Omkar Godbole, analyst at FXStreet.com also expects gold prices could struggle in the near-term.

"The metal is yet to take out the head and shoulders neckline (now acting as resistance) in a convincing manner. Hence, as of now, a close above $1334 looks difficult," he said in a report.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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