What Do Traders Look for with Gold?

Gold Chart

Gold is currently trading at $1,215.85 per ounce, up 0.96% or $11.55. The precious metal has gained 6.40% over the past 30-day period, up $72.40. For the year to date, gold is up 4.7%, and it has an average return of 10.7% since 2002. Its best year on record in that time is 2007 when the price advanced by 30.9%. It should be remembered that gold is a safe-haven asset that thrives during times of geopolitical uncertainty. The recent appointment of Donald Trump to the presidency has had a jarring effect on financial markets. In the run-up to the election, and the immediate aftermath Wall Street equities rallied.

Indices, Currencies, FX and Commodities

The Dow Jones Industrial Average is hovering around the 20,000 level, and sharp gains have been reported with the S&P 500 index, the NASDAQ Composite Index and other minor indices. However, the rally appears to have faded somewhat after Trump’s inaugural address. The USD has been casualty number one after comments made by Trump to various newspapers to the effect that the greenback is overvalued and this is detrimental to US economic growth. An immediate selloff in the USD ensued, and this is evident in the currency cross-exchange rates of major pairs, minor pairs and exotic pairs.

  • The USD/EUR pair is down 0.3426% or €0.0032 at 0.9308
  • The USD/GBP pair is down 0.87% or £0.01 at 0.8012
  • The USD/JPY currency pair is down 1.23% or ¥1.402 at 113.193
  • The USD/CNY currency pair is down 0.31%, or CNY 0.02, at 6.8513

Dollar weakness is confirmed across multiple currencies, and the US dollar index. The vaunted DXY is trading 0.40% lower, down 0.40 at 100.23, slipping away from its 52-week high of 103.82. The index has a 52-week low of 91.92. The DXY measures the performance of the greenback against 6 major currencies including the JPY, EUR, CHF, GBP, CAD and SEK. The most heavily weighted currencies in the DXY are the EUR at 57.6%, the JPY at 13.6% and the GBP at 11.9%.

The Gold Price and the Greenback

The recent weakness in the USD was met by increasing demand for gold, which makes sense. However, as a dollar-denominated asset, gold has also moved independently of the USD. The main driver of gold demand is speculative behaviour and investment activity on major funds like the GLD SPDR Gold shares on the New York Stock Exchange. This ETF is the most important gold fund in the world. This fund is valued at $31.225 billion with 809.15 tonness of gold under its control. Any major capital inflows into this fund naturally fan out into the markets raising the price for gold bullion. In much the same way, any major outflows from GLD will negatively affect the gold price.

The Gold Price and Interest Rates

The gold price has an interesting relationship with interest rates. If rates rise, gold loses favour. The rationale behind this is simple: gold is not an interest-bearing asset. This means that the opportunity cost of holding gold when interest rates are rising is high. Since gold does not pay interest, investors tend to shy away from gold when rates are rising. Instead, they plow their money into fixed-interest-bearing securities such as treasuries, certificates of deposit or savings accounts. The Fed is expected to increase interest rates at least 3 times in 2017. The FOMC will convene again on Wednesday, 1 February, but no rate hikes are expected at this juncture.

While analysts will be cautioning market participants about the impact of rising interest rates (the federal funds rate), many opportunities exist for gold traders in the futures market. Analysts point to important educational resources such as CreditLoan.com for didactic insights into accessing credit in a tightening economy. Interest rates are expected to rise by upwards of 0.75% by the end of 2017, and this will have far-reaching implications for commodities like gold, home loans, personal loans, and overall economic activity. When the costs of capital are higher, the money supply diminishes. It will be interesting to see whether the current long-term trajectory of gold continues and the precious metal continues to lose value.