The price of gold is falling in early action today as a stronger dollar and rising stocks weigh on the metal. The longs appear to have thrown in the towel for now as the market has blown through a key level on the downside, and investors may now take a wait-and-see approach before jumping back into the market.
A Stronger Dollar
The dollar index is currently sitting around a 2.5-week high and recent strength is likely having a significant impact on the gold market. Today, the dollar is moving higher as Q4 GDP came in at 2.2%, in line with forecasts, and as weekly jobless claims showed a decline in the last week.
The dollar index has seen strong gains in the last several sessions despite recent Fed-dovishness. At its most recent meeting, the central bank essentially eliminated its plans for any further rate hikes this year and its commentary seemed to exceed even the most dovish of expectations. The greenback may be getting a boost, however, from the uncertainty surrounding Brexit, the completion of the Mueller probe, and widening rate differentials.
The dollar index recently traded as low as $95.188 but has since pushed its way back up to as high as $96.84. A clean breakout above the $97 level could potentially signal a fresh leg higher for the currency that could potentially act as a major headwind for gold and dollar-denominated asset classes.
Stable Appetite for Risk
Stocks are moving moderately higher today as investors await further economic data. The benchmark S&P 500 has been holding above the 2800 level and could potentially embark on a fresh leg higher in the sessions ahead. An increasingly dovish Federal Reserve may keep equities on the offensive in the months and quarters ahead, barring any major economic or geopolitical issues. Investors will, however, want to see progress on a trade deal with China and will also want to see data suggesting that the economy is not likely headed for recession in the near-term. Any further weakness in key data points or lack of a U.S./China trade agreement in the months ahead could fuel significant risk aversion and major declines in stocks.
The inverted yield curve has gotten significant attention in recent days and was the primary fuel behind a major sell-off in stocks late last week. An inverted curve, in which short-term rates rise above longer-term rates, can potentially be a good indicator of recession as investors pour into longer-dated treasuries, pushing long-term rates lower. The inversion does not, guarantee a recession, however, and such a market condition can be unwound if the economic outlook improves. The Federal Reserve’s recent actions-or lack thereof-along with an inverted yield curve could spell trouble for stocks and the economy in the months ahead.
Although large scale risk aversion has not yet been seen, the economy and stocks are looking increasingly vulnerable and a significant exodus from equities could be seen if a recession looks increasingly likely.
The gold market is sharply lower today. Spot gold is down $18.44/oz at $1291.46 in early action. The market has again failed to maintain recent upside and some bullish momentum has faded. Today’s large decline could be a result of stops being hit, accelerating the decline.
The market could potentially stay range bound until more clarity on the economy and a trade agreement with China is seen. The bulls will need to hold previous support around the $1280 area in order to avoid a fresh leg lower in price. On the upside, the market may need to move back above the $1,300 level before attracting momentum buyers and will then need to take out the recent highs around $1,320 to show significant strength. In the meantime, the market could potentially drift lower before finding aggressive bargain hunters around $1280-$1285.