Strong Dollar Pressures Gold

September 24, 2014

Gold stayed under pressure this month.  And the third quarter is shaping up to be a negative one.  So what’s going on?

This past month, we’ve seen the U.S. economy improve, which has kept investors running to the stock market.

It’s also fueling beliefs that higher U.S. interest rates are coming sooner than expected. This has been pushing up the U.S. dollar.  And with Europe also needing to continue their stimulus and keep interest rates low, it’s adding even more fuel to the stronger dollar.  That in turn is keeping downward pressure on gold.  And it’s causing a decline in the demand for gold.

Global tensions kept gold from falling more.  And as you can see on Chart 1, the dollar index has risen more than gold has declined.   

Nevertheless, money managers are trimming their bullish gold positions: Open interest in NY futures and options is near its lowest in 5 years. 

Uncertainties are abundant

But with so many uncertainties in the world today, we could see the markets turn on a dime. 

Yellen continues to reiterate that lower rates are here to stay until we see better jobs figures.  She insists there is still slack in the labor market.

Plus, considering the faltering world economy, global tensions, the monster debt problem and unprecedented liquidity..... anything is possible.  The U.S. bombing in Syria is just the latest example.

All this means is we have to be prepared for change, and go with it when it happens.

This is why we place importance on our charts.  They help to see changes or subtleties upcoming. They also tell you when to stay with a trend. 

Many have compared gold’s current three year bear market with several major declines of the past.

The bear market of the 1980s-90s was the worst one.  Its loss was not so much of a price loss than it was in the seemingly forever lackluster market.  

Notice the comparison between the last three years  since the September 2011 peak to the start of the major bear market in 1980 (see Chart 2).  As you can see, the loss is less today but the movement is similar.

The point here is, will gold soon resume a bull market in the upcoming years, or will it be similar to that lackluster period when gold essentially moved into a sideways band?  Back then, gold stayed near or above the June 1982 lows with a cap at $500 for more than another decade.

We think this is unlikely in today’s world, but it’s always good to play devil’s advocate. 

For now, the December lows will tell the story and that’s what we’re watching.

If gold can stay above $1193, the December low, it’ll continue building a huge bottom, which will likely be a springboard for higher prices.

If the December lows are broken, however, it’ll be a very bearish sign.

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).