Hawaii Six O - Gary Wagner
Gold has declined by $63 this week and was not aided by today’s dollar weakness
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Gold pricing continues to trade under pressure even in light of dollar weakness. The dollar as well as yields on US Treasuries declined today a rare occurrence in recent trading sessions. Dollar strength and higher yields have been a major component of the hawkish monetary policy of the Federal Reserve. As of 5:50 PM EDT, gold futures basis the most active December contract are trading lower on the day resulting in a sizable price decline over the first four days of this week. December gold opened today at $1944.70 traded to a high of $1946.80, a low of $1874.50, and is currently fixed at $1878.60 after factoring in today’s price decline of $12.30.
This marks the fourth consecutive day in which gold has closed lower when compared to yesterday’s close as well as when compared to the session's opening price. The damage created by this week’s strong price decline is currently $67 or 3.44%. The dollar has gained well over ½ a percent since Monday currently up 0.675 points or 0.64%.
Dollar strength has been a byproduct of the stark announcement by the Federal Reserve last week that they plan to continue to keep the elevated level of rates for much longer than assumed as recently as a week ago. According to their economic projections released at last week’s FOMC meeting, they anticipate that by the end of the year, the Federal Reserve’s terminal rate will be at approximately 5.6%, which infers a high probability of one more rate hike.
But the straw that broke the camel's back was the reduction of rate cuts they plan to initiate next year. In June’s economic projection, Federal Reserve members anticipated pivoting to a more accommodative monetary policy by cutting interest rates a total of 1% through a series of four-quarter percent rate hikes. Last week’s economic projections are now calling for only half a percent of cuts in 2024. This takes the cost of borrowing by consumers and businesses to above 5% for the entirety of 2024.
Today’s decline can be seen through the eyes of spot gold pricing in the Kitco Gold Index (KGX), as of 5 PM EDT it fixed spot gold at $1864.30. This includes a price decline of $10.70 per ounce. However, the truth is more startling in that normal trading favored the sellers who were able to move gold prices to $20.10 or 1.07% lower. Dollar weakness was able to soften the fall by adding $9.40 of value to today’s price decline. However, the strong decline in the dollar was not able to move gold into positive territory.
It is interesting that it is almost a certainty that Congress will not be able to reach an agreement and pass legislation to fund the government meaning that on Saturday, October 1 the US government will officially be insolvent and unable to meet its financial obligations.
The Federal Reserve made a miscalculation when inflation began to slowly ratchet higher in 2021 by not acting soon enough. The truth is that the Fed did not intervene until March 2022 with their first-rate hike of ¼%, after inflation had surged above 8%. Under the false assumption that inflation was transitory and required no action the lack of Federal Reserve intervention was possibly the most inappropriate action (or in this case nonaction) they could have taken. With that in mind is it possible that the Federal Reserve is overcompensating by keeping interest rates elevated for a longer time? This seems a plausible explanation for the heavy-handed hawkish monetary policy that has created an environment where it is exceedingly difficult to purchase a house, with mortgage costs at over 7%.
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Wishing you as always good trading,