Stronger Dollar, Profit-Taking Dent Gold

February 22nd, 2016 by

Stock quotes, no real time quotes at the stock marketMonday morning saw an increased desire from investors for riskier assets as last week’s gains for equities have translated into risk-on sentiment. The rosier perception of the stock markets around the world put a dent in gold’s recent momentum.

Spot gold was down about $15.50 per ounce (down 1.25%) to $1,211.50/oz due to this brief surge for equities. A rising dollar also contributed significantly to the drop, as the DXY index added 1% to 97.5. The silver price fell by about the same margin (-1.25%) to settle at $15.20/oz.

Naturally, some profit-taking was also in order after gold prices posted steep gains over the preceding weeks.

Shooting Craps with Stocks

Not unlike games of chance, even the losing hand gets lucky and wins sometimes. That was largely the case last week when equities finally came up for air. After about 6 straight weeks of losses, a reprieve was in order for the stock markets.

dice-risk-gamblingLast week alone, the S&P 500 added more than 3% while the Nasdaq rose 4.1%. The Dow Industrials were in the middle, advancing 3.4% on the week. Each index was sharply higher to begin Monday’s trading.

The story was much the same across the globe as the turnaround continued on Monday. The Shanghai Composite gained 2.35% overnight, continuing its February rally. Meanwhile, European stock indices were as high as 2% into the green on Monday.

While investors are feeling more confident thanks to the continued rebound, the knowledgeable observer should expect to see more volatility in the near future.

Trouble in Europe

The source of the woes for the financial markets has not been eradicated—namely, weak growth; uncertainty; and increasing reliance upon central banks. Until these overarching structural issues are resolved (and chances are they will never be), you can’t be too sure about the health of Wall Street and its international counterparts.

EU breakupBoth within and outside the U.S., slowing economic growth is a consistent theme. This is especially true in Europe, where policy-makers have struggled to dig the continent out of its current slump. Eurozone Markit PMI came in at lowest reading in a year last month, signaling still more stagnant growth.

Like just about everyone else, Europe is heavily invested in China. This means that weakness in Chinese manufacturing is continuing to have an impact on the deflation and poor performance that Europe is mired in.

What to Keep an Eye On

Manufacturing flash PMI in the U.S. came out this morning, showing the worst manufacturing growth since September of 2009. This mirrors the story in Europe where manufacturing is also slowing to multi-year lows.

The next two major technical support levels for the gold price, were it to drop further, are seen at $1,202/oz and $1,200/oz. The yellow metal would have plenty of room to fall before the next big support level at $1,150/oz. Meantime, resistance is holding at $1,227/oz (the overnight high), $1,235/oz (Friday’s high), and then $1,264/oz (the high for February).

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.