Encouraging manufacturing data in the U.S. released last week are currently weighing on the gold price while helping lift the dollar. It's an open question, however, if this trend continues through the end of the year.
Data Beats Expectations
Defying consensus forecasts, a pair of key data points from the Institute for Supply Management (ISM) revealed robust activity on the producer side of the U.S. economy. While much attention is paid to the sentiment of the American consumer, the readings from the ISM reveal more about the real economy than our spending habits.
The ISM manufacturing index came in at 51.5, solidly above the expected reading of 50.4. Meanwhile, the non-manufacturing PMI (purchasing managers' index) was even better, registering at 57.1 against analysts' forecast of 53.1. In both cases, a reading of 50.0 represents flat growth: anything below indicates contraction, while numbers above show expansion. These strong readings coincided with a precipitous drop in precious metal prices.
Although we will have to wait to see what regional PMI and manufacturing indices tell us about where most of this growth is happening, the baseline reaction has been a boost for the U.S. dollar. Even though a stronger dollar tends to dent the gold price due to their inverse relationship, it has also placed a drag on the stock market. A stronger currency makes American exports more expensive, causing overseas corporate profits to take a hit.
Around the Markets
Elsewhere in the global markets, there are other developments that are dovetailing with the rising dollar. Crude oil prices are still trading near a one-year high after Russia announced it will support the OPEC cartel's decision to try and curb production in order to drive prices higher. Both major oil benchmarks are now above $50 per barrel.
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In terms of foreign currencies, the Japanese yen is finally falling against the stronger dollar after months of gains. The uncertainty wrought by the Brexit decision in the U.K. is continuing to push the British pound sterling lower. The pound's current level just above $1.21 is its lowest in more than three decades. However, the weaker currency is actually boosting the country's stock markets, as the leading FTSE 100 index in London recently notched a new all-time high. The story is similar with Tokyo's Nikkei 225 index, which is matching its highest levels since June. Trading in Japan reopened overnight after being closed for holiday.
All of these developments are generally negative for gold prices in the short term. Despite the impact of strong manufacturing data and greater investor risk appetite for equities, this swift pullback in the precious metal markets last week should generate bargain hunting for gold and silver buyers. Moreover, the piling up of shorts on gold futures could potentially lead to a snap-back when these short positions are forced to cover in the event of a fresh gold price rally.
It would seem that the potential for an interest-rate hike in December is largely priced into the drop for gold already. If economic data falters during the fourth quarter, don't be surprised by a swift reversal of fortunes for the gold market.
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.