Since last Friday, the US dollar has been trading under pressure, losing value on Friday, Monday and Tuesday. During the same period, gold traded under mild selling pressure, holding at just above $1,700 an ounce. The dollar recently peaked just above 109 on Thursday, July 14, before trading lower for three straight days. However, even with the weakness of the dollar in three of the last four trading days, gold has not gained much value.
The decline in the value of the dollar did little to boost gold prices. Rather, they prevented gold from selling off significantly, keeping the precious yellow metal barely above $1,700 an ounce. On Thursday and Friday last week, gold prices fell below $1,700 on an intraday basis, but both times closed just above this key and important psychological price level.
The dollar had further gains in price today. As of 5:10 PM EDT, the dollar index is currently fixed at 106.925 after reporting today’s gain of 0.35%. Meanwhile, gold futures lost $16.40, or 0.96%. This clearly illustrates that today’s dollar strength is adding to gold’s selling pressure, but only by a percentage of gold’s overall decline today.
Spot gold is currently fixed at $1,696.40 after taking into account today’s drop of $16.40. On closer inspection, the strength of the dollar led to a $5.50 drop, with the remaining $10.90 drop directly attributable to selling pressure. This is according to the KGX (Kitco Gold Index).
The recent strength of the dollar and weakness in gold can be directly attributed to the hawkish monetary policy of the Federal Reserve, which has raised rates at every consecutive FOMC meeting since March of this year. Gold traded to its highest level this year in March, trading at $2,078. This matched the first rate hike by the Federal Reserve, which also took place in March. Over the past four months, gold has fallen $383, losing almost 18 ½% of its value.
Exactly one week from today, the Federal Reserve will conclude its July FOMC meeting and will almost certainly announce its fourth straight rate hike this year. Expectations are that the Fed will again raise interest rates by 75 basis points. However, they could raise rates by 100 basis points, although that is seen as unlikely, according to CME’s FedWatch tool. This rate hike indicator currently predicts that there is a 67.9% chance that the Fed will raise rates by 75 basis points next week and a 32.1% chance that they will raise rates by 100 basis points.
This rate hike indicator has seen dramatic changes in its forecasts. A week ago, on July 13, the Fed’s watchdog forecast that there was an 80.3% chance of a 100% rate hike and a 19.7% chance of a 75 basis point rate hike. This clearly illustrates how market sentiment continues to change as the July FOMC meeting approaches.
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Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no liability for loss and/or damage arising from the use of this publication.
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