Hawaii Six O - Gary Wagner
Back to Basics
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Yesterday’s sharp gains in both gold and silver were directly tied to concerns by the European Union that the proposed Italian budget could cause contagion amongst other member nations.
According to MarketWatch, “The euro climbed against other currencies Wednesday amid signs that Italy may yield ground over a budget dispute with the European Union. However, the shared currency relinquished some of its ground against the U.S. dollar amid strong data that spotlighted U.S. economic health.”
It seems as if these genuine concerns have diminished, and now traders are focusing upon the basic fundamentals that have been driving gold and silver prices.
The fundamental forces that have been driving gold and silver prices lower are: rising interest rates, a strong U.S. dollar, and the risk-on market sentiment that has been so prevalent during this bull market in equities.
One of the most influential factors resulting in a bearish demeanor in gold and silver pricing has been dollar strength. From March of this year, the dollar index has gone from 88.55 to its current value of 95.4. That is a net gain of 687 points, which means that the dollar index has gained almost 7% in the last six months.
Because both gold and silver pricing are paired against dollars, a move in the dollar will and must have an exact reciprocal correlation to that move.
Rising interest rates have also put bearish pressure on gold and silver prices. Since 2015, the Federal Reserve has been slowly and incrementally raising interest rates.
The most recent rate increase occurred at the conclusion of last week’s FOMC meeting. It is also widely anticipated that the Fed will implement one more rate hike during the December FOMC meeting. If implemented, this would be the fourth rate hike this year, and the ninth-rate hike since the Fed ended its quantitative easing program in 2015.
Lastly, the strong risk-on market sentiment which is a result of the bull market in U.S. equities continues to be firmly ingrained in traders and investors disposition.
Today the Dow Jones Industrial Average gained 54 points and closed at a new all-time record high at 26,828. This historical climb to new record highs has been based upon the strong, robust U.S. economy that continues to run on all cylinders. Today’s climb is partially due to the ADP national employment report for September, which revealed that 230,000 jobs were added last month.
While yesterday’s strong upside move in gold was genuine in regards to concerns over Italy’s budget, it seems, at least for now, to be a concern that is temporally resolved, and traders are going back to basics when looking at the underlying fundamental factors affecting gold and silver pricing.
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Wishing you as always, good trading,