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Gold’s Weakness Is More Than Just U.S. Dollar Strength – BK Asset Management

Kitco News

(Kitco News) - Everyone know about the U.S. dollar’s impact on gold prices, but as the yellow metal struggles to find momentum, one currency analyst said that investors should instead focus on equity markets and volatility.

In a recent commentary for CME Group, Kath Lien, managing director of FX strategy for BK Asset Management, said that the U.S. dollar’s resilient strength is just one factor in gold’s lackluster performance since hitting its February high. She said that equity markets are also impacting investor appetite for gold.

“While GDP growth peaked in 2018 and the Federal Reserve stopped raising interest rates in response to the slowdown in the economy, stocks hit six-month highs in April, with the Nasdaq and S&P 500 reaching all-time highs,” she said. “This fostered an appetite for risk that is encouraged by low volatility. If stocks continue to rise, volatility will remain low, and investors will have fewer reasons to own gold.”

Lien added that if gold is going to have a chance a reaching its early-year highs, then equity markets have to reverse their current uptrend.

“Gold typically bounces when volatility returns, and that should coincide with a peak in stocks,” she said. “A sharp sell-off in equities would be a tipping point that triggers widespread profit-taking and broad-based risk aversion -- similar to what we saw in December and January.”

As to what could trigger a sell-off, Lien said that trade issues between the U.S. and China and Europe could prompt some investors to take some profits.

“Oftentimes, stocks correct for no reason at all. They sell off sharply one day because of one small factor, and the fear of further losses drives them even lower, triggering stops that accelerate the slide,” she said.

Looking at the U.S. dollar, Lien warned investors to not expect a sell-off anytime soon, citing relative economic strength in the U.S. compared to the rest of the world. Positive interest-rate yields and healthy growth in the U.S. labor market will continue to support the U.S. dollar, she said.

“All of these factors should keep the dollar strong for the time being and undermine the chance of a recovery in gold,” she said.

Although off its highs, the U.S. dollar continues to hover at the top of its range near a two-year high. The U.S. dollar Index last traded at 97.68 points, up 0.22% on the day. Meanwhile, gold is struggling to find momentum to bounce off a recent four-month low. June gold futures last traded at $1,278.90 an ounce, down 0.19%.

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