Surging dollar drops gold price through $1,200

The dollar has had a piercing run

On Thursday gold futures retreated more than $10 an ounce to below the psychologically important $1,200 an ounce level for the first time since end-March.

Gold for delivery in June – the most active futures contract – was bid at $1,194.70 during lunchtime trade in New York not far off its day low as it retreats from a six-week intraday high struck on April 1.

Gold bounced off a near 4-year low of $1,148.20 an ounce mid-March but the metal is trading more than $110 an ounce below its 2015 high reached in January.

Silver has had the worst of the change in sentiment, trading as low as $16.14 an ounce – down 6% on the week and almost 14% below it January peak. Platinum is down 10.1% since its January high, while palladium futures have lost 8.4% in just over a month.

Gold’s recent weakness is being blamed on expectations of an interest rate hike in the US – the first in more than six years – being announced at the US Federal Reserve’s meeting in June.

The Fed’s interest rate setting committee meeting minutes released yesterday showed some commitment to a hike in June with “several” participants judging that “the economic data and outlook were likely to warrant beginning normalization” mid-year.

By a unanimous vote the Fed on March 18 also decided to remove forward guidance that they would “patient” on increasing rates and would decide on a meeting-by-meeting basis.

The gold price and interest rates have a strong negative correlation. As the metal produces no income, the opportunity costs of holding gold rises in a high-yield environment. Higher interest rates also boosts the US dollar.

After a recent pullback, the world’s reserves currency surged again on Thursday, jumping over 1% – a major move on currency markets where crosses usually move by only a few basis points.

At 99.25, the USD Index is back within striking distance of 12-year highs above the 100-level struck mid-March that coincided with gold’s 2015 low. The US currency has appreciated 23% against the currencies of its major trading partners over the past year.

While nowhere near its peak of the mid-80s, the past year has been the greenback’s strongest run in more than forty years. Over the past 12 months the dollar has appreciated the most of any 12-month rolling period since 1973.

Conventional wisdom is that the gold price and the dollar move in opposite directions. The dollar’s all-time peak of 164.7 was reached in February 1985. That coincided with a bottom in the price of gold of $284.25 an ounce.

This graph from Capital Economics, an independent research house, suggests should the dollar continue to strengthen it may drag down precious metals even further:

Surging dollar drops gold price through $1,200

Source: Capital Economics