The U.S. dollar is once again resuming its dominance, knocking the precious metals lower during early trading on Tuesday. With the U.S. dollar trending more than 0.5% higher against a basket of its peer currencies, the spot market for gold and silver saw strong selling this morning. Spot gold was down about $6 an ounce to $1,228/oz while spot silver lost 10¢, or 0.6%, to trade at $17.85/oz.
However, gold and silver largely recovered their losses later in morning trading, as gold jumped back to $1,234/oz, just below unchanged, while silver actually added 5¢ an ounce to $18/oz.
Basically the entire losses recorded on Tuesday by gold and silver can be explained by the rally for the dollar. The DXY was trading above 101.5, its highest in five weeks. This knocked the euro down to nearly $1.05 as the common currency is coming perilously close to parity with the dollar. The British pound sterling also lost ground, falling to $1.24. The Japanese yen, meanwhile, slipped 0.3% from its recent strength, trading back near 113¥ per dollar. The yen has advanced almost 13% year-to-date already.
The stock markets were also trading in the green on Tuesday, with all three indices in the U.S. opening about 0.5% higher by 10 am EST. European stocks were mostly in positive territory, with the EURO STOXX 50 leading the way 0.75% higher. Shares were higher in Tokyo (+0.68%) and Shanghai (+0.41%) overnight, although Hong Kong markets lost 0.76%.
Yet again on Tuesday, the standard relationship between the dollar and commodities appeared to be losing its grip, as both the greenback and commodities advanced in tandem. Expect some action in the energy markets today as Tuesday marks the expiry of March crude contracts.
Watching the Fed
Markets will eagerly await Wednesday's release of the most recent meeting minutes from the Federal Reserve Open Market Committee (FOMC). Most analysts are expecting the minutes to reveal a generally hawkish Federal Reserve, which Commerzbank has suggested would be a bearish development for gold prices. Although the conventional wisdom says that higher interest rates dent the appeal of gold as an investment, history tells us that the beginning of a rate-hike cycle from the Fed actually portends higher gold prices in the near-term. (See the chart below.) This is most likely due to the economic uncertainty that is associated with such shifts in U.S. monetary policy—from which much of the rest of the world's central banks take their cue.
Nonetheless, the next few months ought to be turbulent for the precious metal markets due to these conflicting forces. Although the prospect of higher interest rates will drive some money out of the gold market and into fixed income in search of higher yield, the chances are good that the Fed's desire for an orderly return to normal interest-rate levels will be fraught with both political and economic difficulties. This cloud of uncertainty could prompt safe-haven plays on gold, which would counteract the negative impact of rates going up.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.