The gold market is seeing some strong buying in early action today as the dollar index weakens and some key data points potentially point to slowing growth. The yellow metal is up nearly $18 per ounce at $1232 in early trade.
ISM Misses Expectations
The latest reading of the ISM Manufacturing Index was a bit of a letdown today. According to marketwatch.com, the gauge dipped to a six month low with a reading of 57.7. Consensus estimates were looking for a reading of 58.7. It has been suggested that among other factors, purchasing managers are likely considering tariffs, decreasing foreign demand and shortages.
Although the latest reading is still positive, it does potentially point to slowing demand and lower growth. This trend has been seen in other key data points recently, and the economic effects of tax cuts and government spending may be starting to fade.
The dollar index is seeing some heavy selling today as it pulls back from a multi-month high. Looking at the bigger picture, however, the trend in the greenback remains higher. The currency could potentially come under increasing pressure if the stimulus effects of tax cuts and fiscal spending begin to wear off.
Dollar strength in recent months had proved to be a significant obstacle to higher gold prices. A major reversal in the greenback could fuel further buying in gold and other dollar denominated asset classes.
The Big Picture
The dollar index and higher equity markets have likely been the primary factors keeping a lid on gold prices over the last several months. Stocks are sharply higher again today as the bulls look to string together a three-day winning streak. Despite the current rally, however, stocks could once again find themselves under significant pressure.
Both stocks and the dollar could be vulnerable to further selling if more economic data fails to meet expectations or if a deal with China over trade is not reached. The notion of rising bond yields, an ongoing trade war and the uncertainty surrounding the upcoming midterm elections could lead to a major asset reallocation.
It is worth noting that gold is sharply higher today along with stocks. The correlation today is significant, as it could be indicative of investors seeing trouble down the road. Although some investors may be looking to get ahead of the curve, more significant inflows may be seen if stocks once again begin to falter.