Stronger Dollar Suppressing Gold

Market Gage - Gold Bear or Bull

The stronger dollar index that is now at the 95 level is keeping Gold from edging higher. Meanwhile, investors and traders are preoccupied with all the news flooding the news channels on our ongoing immigration policy and a potential trade war with China. I wonder how any investors can think straight with what’s going on these days?

Over the last few days, some financial advisors I spoke with have indicated that some of their clients who were holding physical Gold sold some of their holdings to cover margin calls in equities, as the Dow lost ground for a few days.

U.S. – China Trade War

President Trump is digging in his heels. He has directed the U.S. Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent. Trump said he was taking action because China “has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology.” U.S. Secretary of State Mike Pompeo amplified Trump’s tough line on trade in a speech Monday, saying U.S. action was long overdue and calling Chinese appeals for greater economic openness “a joke.” The comments came as Chinese President Xi Jinping appears poised to match Trump blow for blow in tariffs. In his announcement of levies on Chinese goods this past Friday, the President had vowed additional duties if China retaliated and Beijing immediately did.

How a trade war with China can affect the price of Gold.

Some have noted that China can seek revenge by selling U.S. Treasuries. But in doing so, they would likely cause a spike in yield, lowering the value of the bonds they have now, and thus hurting their own dollar reserves.

It is not in China’s best interest to cut off its nose to spite its face, but this is becoming an all-out trade war so all bets are off. Reducing its Treasury position can impact the value of Chinese currency and China has been reducing its U.S. Treasury purchases all year.

As the trade war rhetoric got hot and heavy in the last few trading days, many Wall Street Gold day traders exited the Gold market as the price broke thru the previous RSI buy indicator at $1,285 accelerating the selloff in the yellow metal. Friday’s CME Gold Futures trading volume hit a whopping 555,000 contracts.

At this point, one saving grace for the Gold market is that the threat of a trade war can put the Fed in a holding pattern on future rate hikes, because it could increase inflation here in the states and stagger growth and totally wipe out any tax benefit already in place. (Higher interest rates are negative for Gold because they raise bond yields, reducing the attractiveness of non-yielding gold, and tend to boost the dollar. )

Have a wonderful Wednesday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals for information and thought-provoking purposes only and does not purport to predict or forecast actual results. This editorial opinion is not to be construed as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein cannot be attributable to Dillon Gage. Reasonable people may disagree about the events discussed or opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. It is not a solicitation or advice to make any exchange in commodities, securities or other financial instruments. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisers with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.