April gold futures settled down $6.30 or 0.29% to close at $2183.30. Today gold opened at $2183.40, traded to a high of $2188, and is currently fixed at $2166.50, down $16.80 or 0.77%, after setting a new record high earlier in the week.
Despite gold prices reaching that new record high, it was dollar strength that caused gold to fall, rather than selling pressure. On Thursday as well as today it was dollar strength that moved gold lower from its new record high of $2225.30.
On Thursday, the U.S. dollar index opened at 102.92, traded to a high of 103.74, and closed just off the high at 103.665, resulting in a net gain of 0.60%. Today the dollar index opened at 103.665, traded to a high of 104.20, and is currently settled at 104.175 after factoring in a net gain of 0.49%.
When we compare value changes in the dollar index over the last two days to gold’s price action in the same period, we can determine if market sentiment has also changed.
Yesterday’s price decline in gold of 0.29% is roughly half of the gains of 0.60% in the dollar index. This means that yesterday’s decline in gold futures was a combination of extreme dollar strength and buying by gold traders. Today gold lost 0.77%, and when compared to dollar strength of 0.49% one can extrapolate that today’s decline was inversely a combination of dollar strength and gold traders actively selling, which accounted for 0.28% of today’s decline of 0.77%.
The importance of calculating the influence of dollar strength over the last two days is to illustrate that after hitting $2225.30 and then retracing, it was dollar strength that overwhelmingly took gold lower rather than selling pressure. The reason this is an important factor is that typically when any stock or commodity hits a new record high, it is met with profit-taking and selling pressure moving that asset lower.
Because gold is paired against the dollar, dollar strength or weakness becomes a critical component of the net move on any given day. In the case of gold’s recent move to a new record, it was dollar strength that played the larger role in moving gold back below $2200, more than gold investors and traders liquidating positions or selling.
Our studies indicate that there is still strong technical support above $2150 in the April contract of gold futures. At the same time, it was not technical influences that have made up the most important underlying force that moved gold off recent highs, but rather dollar strength.
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