An upbeat assessment of the U.S. economy and an outlook of gradually rising interest rates by the chairman of the U.S. Federal Reserve during his testimony to the Senate provided support to the U.S. dollar yesterday and in turn weighed on gold.
Prices were down 1 percent, reaching the lowest levels in more than a year. While technically driven selling likely added to the downward move, it underpins our view that U.S. investors are focused on their strong home economy.
They do not seem to be too concerned about the trade tensions and the related risk of a trade war. Consequently, gold is out of favour with U.S. investors. They kept on selling this month, while buying from European investors slowed considerably.
Lacking demand, gold is very vulnerable to technically driven selling and continues to follow the U.S. dollar. Over the past 40 years, prices were down 1.1 percent on average per month when the dollar appreciated and up 2.2 percent when it depreciated. While we expect further short-term dollar strength, we still believe the downside for gold should be limited against the backdrop of elevated economic uncertainties and already very bearish positioning in the gold futures market.
Short positions, i.e. bets on falling prices, by speculative traders such as hedge funds are approaching record levels. With the U.S. dollar expected to eventually roll over and upside pressure to U.S. bond yields easing, medium- to longer-term buying opportunities should open up.
Sustainable upside should materialise once growth and inflation concerns creep into financial markets, reviving the demand for gold as a safe haven. Against this backdrop, we believe structures that allow accumulating gold on lower than prevailing prices, i.e. to average into the market, are a good option to build positions gradually.
A strengthening U.S. dollar and technically driven selling pushed gold down to the lowest levels in more than a year yesterday. Due to the strong U.S. economy, it is out of favour with U.S. investors that do not seem to be too concerned about the trade tensions. Headwinds from a stronger dollar should fade as the year progresses, opening up medium- to longer-term buying opportunities.
Any opinions expressed here are the author’s own.
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