Gold Loses Its Way As Dollar Index Breaks Out

October 28, 2017

Summary

  • Latest ECB policy statement weakens euro and boosts U.S. dollar, denting the gold price.

  • Main factor for gold outlook in the near term is the dollar, which is gaining strength.

  • Gold hangs just above its Oct. 6 pivotal low; a move below this level invites more selling.

Gold prices fell on Thursday after a central bank policy announcement. The dollar index rallied after the European Central Bank (ECB) said it would reduce its bond purchases but hedged the move by also extending the lifespan of its bond-buying program. While the policy move was seen as the catalyst to gold's latest decline, there was a more immediate factor behind the weakness as we'll discuss here.

Spot gold was 0.90 percent lower on Thursday at $1,267. December gold futures fell by a comparable amount to $1,268. Also weighing on gold and boosting the dollar was speculation that the next Federal Reserve chair could be a policy hawk, following reports that current Fed chair Janet Yellen is no longer a candidate.

The ECB's decision to cut back bond purchases was widely expected and had already been discounted by gold and the dollar. The move to extend the bond-buying program's lifespan resulted in a 1 percent decline in the euro currency while the dollar rallied by a comparable amount.

European stock markets gained, following the ECB decision as investors discounted future rate increases, moving back into risk assets and away from safe havens like gold, bonds, and the Japanese yen.

It was also reported on Thursday that President Trump conferred with Republicans on whether they would prefer Stanford University economist John Taylor or current Fed Governor Jerome Powell for the job, with more senators expressing interest in the hawkish Taylor. Investors seem to believe that a Taylor-run Fed would be negative for gold prices and bullish for bond yields.

Speaking of polls, a Reuters poll revealed that analysts believe gold prices will be flat in 2018 as rising US interest rates undermine the metal's attempts at building on its 2017 progress.

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Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “2014: America’s Date With Destiny.” For more information visit www.clifdroke.com.

Small amounts of natural gold were found in Spanish caves used by the Paleolithic Man about 40,000 B.C.