This morning’s press conference by European Central Bank (ECB) President Mario Draghi sank the value of the euro and boosted the U.S. dollar. The big spike in the dollar immediately hit precious metals, sending gold prices down more than $5.00 an ounce to under the $1,200/oz mark.
This was the second blow of a central banker one-two punch, as hawkish comments by Fed Chair Janet Yellen boosted the dollar yesterday afternoon.
The precious metals spot market shows only palladium out of the big four metals posting gains, still being supported by forecasts of higher auto sales. Spot gold lost more than 1% Wednesday, closing down $12.70 to end at $1,204 an ounce. Spot silver lost 15¢, but was able to barely keep its head above the $17.00 mark. Platinum didn’t escape the dollar-induced pullback, dropping $13 (-1.33%) to close at $961 per ounce. Palladium once again beat its peers, only losing $2 to end at $746/oz.
Yellen (and Draghi) In Your Ear
Not only precious metals, but oil and most other commodities were hammered in afternoon trading on Wednesday after Janet Yellen told a crowd in San Francisco that the Fed would have to continue raising interest rates as the economy recovers and inflation nears the central bank’s goal of 2%. “Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.” she said.
The public’s reaction to the speech was responsible for the afternoon spike in the dollar, which send commodities lower. As interest rates rise, the dollar becomes more expensive when measured against its peers. As noted above, Mario Draghi’s promise that the ECB isn’t even talking about tapering its quantitative easing policies sent the U.S. dollar sharply higher.
Crude oil was trading more than 1% higher on both sides of the Atlantic Ocean on Thursday in spite of the USD trading higher once again. WTI crude futures for February were 60 cents higher at nearly $51.70 per barrel, while the March Brent crude contract rose in lock-step—both benchmarks were 1.17% in the green—this morning to $54.55/bbl. Meanwhile, natural gas continued its slide lower, falling 0.7%.
Despite apparent tailwinds for the price of gold and the Platinum Group Metals, silver futures pointed sharply lower during trading on Thursday, giving up over 2.6%. Concerns over how China will adjust to the protectionist trade views sweeping across Western economies weighed on copper prices, which have shown volatile up-and-down trading the past two days.
The equity markets have also experienced some volatility this week as news and insights continue to come out of the World Economic Forum meeting in Davos, Switzerland. (Interestingly, Chinese President and Communist Party chief Xi Jianping has tried to reassure wary investors by positioning the People’s Republic as the free-trade proponent in an increasingly protectionist international environment. It was also the first time the country’s highest-ranking official had ever attended the annual gathering of the financial elite.
The Dow Jones and S&P 500 were each lower this morning even as reports showed housing starts in the U.S. jumped 11% last month while weekly jobless claims are holding near a 43-year low. These indices showed an odd divergence with the tech-heavy Nasdaq (NFLX), which charted higher in early trading partly due to Netflix adding 5.4% to a record-high and electric automaker Tesla (TSLA) gaining 3%. By about 10:45 am in New York, the indices had largely converged in negative territory. The Dow is staring at its fifth consecutive losing session barring a reversal; by contrast, gold just snapped a seven-day winning streak.
After the pound sterling’s strong rise on Tuesday following a show of confidence and conviction from British Prime Minister Theresa May, the GBP gave back some of these gains on profit-taking and a stronger dollar. The DXY index showed the dollar up 0.7% against it major peers. The greenback rose about 0.5% against the Japanese yen, while the EUR/USD and GBP/USD both moved in the dollar’s favor on the forex market, by 0.2% and 0.35%, respectively.
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