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LAWRIE WILLIAMS: Gold held back by dollar index upturn

It had looked like gold might be trying to break out from its recent $1,230- $1,250 range following the U.S. Independence Day holiday last week – indeed it broke through $1,260 yesterday before being brought back down again to below $1,250 at the time of writing,, probably due to a return to some strength in the US Dollar index (DXY) which has risen back up to 94.42 and rising.  Only four months ago the DXY had fallen as low as around 88.5! The recent weakness in the gold price has been closely related to US Dollar strength with the inverse correlation between gold and the DXY index being very apparent.

The dollar index has been driven up by market perceptions that the developing global trade tariff ‘war’ is positive for the greenback, but this might well be a false impression as counter tariffs start to be implemented by those countries directly affected by President Trump’s impositions.  While the tariffs may help protect some parts of the U.S. industrial complex, other sectors will be hit by the counter tariffs, and domestic prices will undoubtedly see an increase from those relying on affected imported goods.  This will advance inflation, which may suit Federal Reserve policy but could adversely affect the President’s approval ratings and weaken the Administration’s resolve.  In the worst case scenario this could all trigger the start of a domestic multi-year recession as some economists fear and a parallel downturn in the equity markets. If the latter is seen as beginning to fall this could turn into something of a rout.

The cynics will say that this is yet another case of a manipulated (suppressed) gold market with the two prongs of the attack being the COMEX gold futures and the U.S. Dollar index, both of which can be moved by powerful players in the markets.  While such a scenario is strongly denied, recent well-publicised cases of manipulation of other major key markets like LIBOR, does suggest the cynics may well have a point!

Should equities markets dive as many are predicting – they are seen as being unsustainably high at present – a rush for liquidity could generate another downside for precious metals as good assets are sold to provide cover for bad deals gone worse. 

Analysts have pointed the finger at the strong equity markets as a reason for traditional safe haven assets like gold falling out of favour with investors so, as we saw in 2008, gold in particular would likely be one of the first major asset classes to see a recovery, thus re-affirming its safe haven status and would likely go from strength to strength.  We are beginning to see some big players moving investment into gold – the most recent being the Swiss government’s pension fund which has moved paper gold holdings into physical metal.  We are also seeing something of an upturn in Central Bank gold purchases.  All this portends well for gold in the medium to long term, but there could well be short term problems for the price ahead although it is looking fairly resilient at the moment despite the stronger dollar.

10 Jul 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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