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Gold Dips, Lost For Direction as Dollar Stubbornly Strong Post-Fed

Published 09/17/2020, 04:13 PM
Updated 09/17/2020, 04:25 PM

By Barani Krishnan

Investing.com - Gold resumed its slide on Thursday, a day after the Federal Reserve said U.S. interest rates will likely stay near zero for another three years — a pledge that ended up benefitting the dollar instead and exposing, once again, the goofy side of financial markets.

“XAU/USD in no-man's land awaiting a catalyst,” precious metals analyst Ross Burland said in a blog on FX Street that used the trading symbol for bullion. 

“Gold prices have been in consolidation for some time, yet the Fed was unable to encourage a breakout,” Burland wrote. “Bulls will now hope for a deceleration of both USD's recovery, COVID-19 spread and signs of inflation and lower real yields.”

Credit Suisse (SIX:CSGN), in a note, suggested a deep correction ahead for gold that could send the yellow metal to $1,765 an ounce from current levels that were nearly $200 higher.

The Swiss financial group said its base case objective for gold remained bullish at $2075/80. 

Yet, the path of least resistance was lower, it said.

“Whilst we continue to see the long-term trend higher, reinforced by falling US real yields and a falling USD, our immediate bias remains for further consolidation above a cluster of supports at $1897/37, which includes the 23.6% retracement of the rally from the 2018 low,” it said.

In Thursday’s trade, U.S. gold for December delivery settled down $20.60, or 1.1%, at $1,949.90 per ounce.

The spot price of gold, which reflects real-time trades in bullion, was down $10.97, or 0.6%, at $1,948.33 by 4:00 PM ET (20:00 GMT). 

Gold bulls have been trying to revive momentum in the yellow metal since the market’s slump from August record highs of nearly $2,090 an ounce on COMEX and $2,073 on bullion.

But they’ve been stumped without fail by the logic-deying strength in the dollar, which has mostly held to its key bullish 93-handle over the past six weeks despite dovish Fed policy.

At its monthly policy meeting on Wednesday, the central bank again left U.S. rates at near zero in an effort to heal the economy from the ravages of the COVID-19 pandemic. The Fed, in a forecast, also indicated there would be no change to rates through 2023.

Yet, the dollar rallied and held to its 93-handle for most of Thursday, sliding below that level only late in the day.

Some analysts tried to explain away the greenback’s strength to the Fed’s lack of commitment to further asset buying that could support the economy.

But that was clearly untrue from the central bank’s policy statement for September, issued Thursday, which said over the “coming months, the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities, at least at the current pace, to sustain smooth market functioning and help foster accommodative financial conditions.

This action, the Fed, was to support “the flow of credit to households and businesses.”

It clearly goes to show that if the market has a bias, it will find a narrative for it. 

Latest comments

Honestly, I saw the dollar almost 0.50% + today and the day ended almost -0.35 ... I am starting to think that gold will only take one direction after the elections.
dollar looked strong beginning of the day but looking pretty weak now... let's see if it breaks my bet is it does
Mr. Krishnan, I have been reading your recent commentaries on what you consider to be temporary irrational behavior with regard to gold and the US dollar. I never make public responses, but felt the need to clarify a couple very important points of which you may not be aware. First off, the US dollar is at (and holding) a multiyear upward trendline. Moreover, it has likely bottomed on a technical basis. My second major point is that the U.S. is probably going to be experiencing DE-flation for a number of years and not IN-flation, which is what typically fuels gold. Whether the Fed says that it will allow inflation to run above its 2% target rate is actually irrelevant, because it is probably not going to get there for quite some time. Again, these are deflationary times...at least for a couple more years. Long story short, I would expect gold to have one last spike up (maybe 2150-2250) and then a prolonged downturn because of dollar strength.
I fully agree with you here. I see as well deflaction for the forthcoming future 1 to 3y (a lot depends of economic and fiscal policy implemented as well as a potential crash in equities). Then, IMHO, when we'll see growth again we might see a rise in inflation. Important is the point that you highlighted for the fact that with the "money printed by Fed" the banks are enlarging their bank reserves, and they should use that money to allow more loans for individual and companies. However, they still have to make sure that that money gets returned, they are liable for that! But, based on the current situation of uncertainty, the banks have tightened access to credit; therefore that money is mostly trapped awaiting better times. This is confirmed by the Velocity of Money which is at the lowest levels. I am long in Gold, but if the correction in equities will continue, IMHO we'll see also a correction in gold. I'm using DCA in gold, awaiting for the inflation (likely years!)
you are assuming that the markets will contiue to be supported through welfare. the point of a free market and capitalism is for markets and business to sink or swim on their own. if the markets and business were forced to deal with the consequences of their actions gold and silver would be in a drasticlly differmt place. sooner or later this will happen.
 I agree when you say Dollar Index has been holding at the mid term ascending trendline. However, it has already broken decisively below the short term trendline on July 27th when it broke below 94 and all these days struggled and failed to reclaim the lost fort of 94 since then. Fell deeper, took support at 91.72 on the mid term trendline, tried to bounce but failed to attract buyers to resurface above 94. Unless Dollar finds rescuers to take it above 94, the world reserve currency has chances for a further fall to 90 and 88 and even 86.60 Ten Trillions printing has to have debasement effect on the currency value, add to the inflation. Unemployment, Lay offs, Defaults have only started. As for the Gold bull trend, correction is inevitable towards 1890-1835-1770 however this would only be a golden chance for the buyers, the main trend is clearly up and highly bullish with targets 2127-2250 and much higher.
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