Morning Market Update May 1: Attack of the Dollar

May 17th, 2013 by

The U.S. dollar set a new 52-week record this morning, with the DXY hitting 84.3100. This is a hammer blow to all commodities, including precious metals. Gold is down for the seventh day of trading, and briefly hit a four-week low of $1.363.90 before bouncing back. Most of the action today is speculators rotating from long positions and adding to shorts.

News yesterday that George Soros cut his gold ETF holdings by 12% in the first quarter, to 530,900 shares, as well as some larger funds cutting gold ETF holding in half, helped depress gold prices yesterday, and continues to be talked about today. This is mainly psychological, as the the ETF outflows were reported back when they happened – it’s just that no one knew who was selling until the CFTC report.

This week’s anemic inflation numbers was seen to give the Fed more elbow room in continuing to implement its purchases of $85 billion a month in bond and mortgage-backed securities. Since hedging against inflation is a major property of gold, the reduced risk of seeing inflation in the near future is enticing more investors to dump the metal to chase yield in the red-hot stock market.

Speaking of U.S. stocks, Fed officials were out in force yesterday, intimating that the Fed may soon “take away the punch bowl” and end the party on Wall St., by tapering or stopping its quantitative easing. This led the S&P 500 to have its worst day in almost three weeks.

However, if the Fed was really thinking about tapering or ending QE, there would be plenty of official warnings. Stockbrokers would be rioting and calling for Bernanke’s head if the Fed’s QE program scaled back with no warning. There is a possibility that the Fed is using these unofficial statements to curb “irrational exuberance” in the stock market.

by David Peterson