Gold Price Rises Modestly on Short-Covering

December 19th, 2016 by

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Spot gold poked its nose into positive territory during early trading on Monday, rising about 0.4% to $1,140 per ounce. This stood in contrast to the rest of the precious metals: silver prices and platinum prices both slipped roughly 0.5%, while palladium was the biggest loser, giving up nearly 2.5% to fall below $680/oz.

Dollar Drag

The dollar’s strength was the predominant factor weighing on precious metal prices; the DXY continued to hover around 102.9 while trading flat on Monday. The difference for gold was a combination of buyers finding bargains in the physical markets (coins and bars) and speculators covering their short positions in the futures markets.

Besides driving action away from safe-haven assets like the precious metals, the rally for the dollar has had a devastating effect on emerging markets, making these countries’ dollar-denominated debt more expensive to service in terms of the local currency.

Outside Markets

Crude oil prices slipped again on Monday in part because of the impact of the dollar’s strength. The 14-year high for the USD is having an impact on oil prices in foreign currencies, as well. It would also appear that the markets are a bit skeptical about whether OPEC will be able to follow through on its proposed production cuts next year. The cartel has defied its own agreements in the past, as its plans are not binding (nor enforceable) for the member countries. The success of the production cut depends entirely on the voluntary cooperation of OPEC members. Brent crude slid below $55 per barrel while West Texas Intermediate (WTI) dipped below $52/bbl.

Expect quieter activity across all the markets this week as we approach the Christmas holiday. Many traders will be packing up for vacation the nearer we get to the weekend, leading to thin trading volumes. Keep in mind that the drop in the gold price over the past six weeks is partly related to year-end window-dressing, as some funds and individual investors sell off their holdings in order to make their portfolios look better to close out 2016.

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A similar dynamic could give equities a pause as investors and portfolio managers engage in tax-loss selling to end the year. Dumping losing stocks at year-end helps offset the tax burden of other capital gains in these portfolios. Considering the stock indices in the U.S. and around the globe are at or near all-time highs, it wouldn’t be altogether surprising to see a correction, anyway. Moreover, bond yields have been rising as an aggressive sell-off in fixed income continues. A falling bond market should signal higher inflation expectations, which would be supportive of the gold price.

In other news in the financial markets, International Monetary Fund (IMF) chief Christine Lagarde was found guilty of negligence by a French court in connection to an award she approved to a businessman while serving as the country’s finance minister. The payment exceeded €400 million. Despite the guilty verdict, Lagarde will receive no formal punishment, although the ruling does cast some doubt on her commitment to ethical standards.

 

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.