Gold is currently trading at $1,277.30 per ounce, for a 30-day appreciation of 4.49%, or $54.70 per ounce. Over the past 6 months, gold has edged 3.46% higher, or $42.60 per ounce. The precious metal’s performance in USD has been notable over the years. The average annual percentage change in the gold price measured in US dollars is 11.2%, with a 10.7% year-on-year appreciation in 2017. In Indian rupees and British pounds, the gold price has averaged the highest returns, with an average annual percentage change of 12.8% and 12.2% respectively. Gold’s performance is largely related to US economic indicators, notably the strength of the USD.
Gold Price Hinging on Strength of USD
When the US dollar index – a broad measure of the greenback’s performance against a basket of 6 currencies – dips, the demand for gold increases. The US dollar index includes the following weighted currencies (EUR 57.6%, GBP 11.90%, JPY 13.6%, CAD 9 .1%, SEK 4.2% and CHF 3.6%). The currency with the strongest impact on the DXY is the EUR. A strengthening of the European currency relative to the USD will weaken the US dollar and increase demand for gold. Since gold is a dollar-denominated commodity, its price is correlated to the strength of the US dollar.
A rising USD results in lower demand for gold stocks, exchange traded funds, and physical gold bullion (bars, coins, and other deposits). Recently, we have seen the gold price stabilizing towards the upper $1,200 per ounce range. On Tuesday, 1 August 2017, gold hit a 7-week high, following tepid consumer expenditure figures, and lacklustre inflation. When the US economy is performing sub-optimally, the likelihood of further interest rate hikes diminishes. When traders, investors and speculators question the Fed’s resolve to raise the Federal Funds Rate, they tend to adopt a bearish approach to the USD. This bodes well for gold.
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Ongoing weakness with US economic data is a strong driver of market uncertainty. Weiss Finance expert Stanley Thanis points to the GBP/USD, and EUR/USD currency pairs as examples of dollar weakness. ‘I really believe that the Trump Trade phenomenon has slowed down considerably. The Trump Presidency has been marred by indecision, inaction, and constant infighting. This has unfortunately spilled over into financial markets where bullish sentiment is waning. Nonetheless, gold has benefited. It has bounced back from the low $1,200 per ounce level, and it is slowly creeping higher as traders believe that further rate hikes are unlikely.’
Probability of a Fed FOMC Rate Hike
An important measure of market sentiment on interest rate hikes is the CME Group FedWatch tool. According to the latest statistics, there is a 1.4% probability of a 25-basis point rate hike in the region of 1.25% – 1.50% on 20 September 2017. Based on current probabilities, there is a 98.6% likelihood of interest rates remaining at their current levels.
As we extrapolate further into the year (there are just 3 Fed FOMC meetings left in 2017), the probability of a 25-basis point rate hike on Wednesday, 1 November 2017 is 7.2%, and the likelihood of a 25-basis point rate hike on Wednesday, 13 December 2017 is 42.5%. As we push the prospect of a rate hike further back, demand for gold gains momentum. Other drivers of the gold price include US factory activity.
Recently, US factory activity plunged from a 3-year high recorded last month, driven in large part by slow inflation growth and anaemic increases in consumer spending. If the Fed acts in 2017, it is likely to raise the Federal Funds Rate in December. This gives gold plenty of time to rally, and traders will certainly want to cash in on the short-term bullishness of this precious metal. An important measure of market sentiment with gold is SPDR Gold Trust (GLD).
This is the world’s largest exchange traded fund of gold, and movements in this fund are reflective of market movements overall. The current price of SPDR Gold Shares (GLD) is $120.40 per share, and the year to date gains of this fund have risen from $110.86 per share to its current level. This is in line with the performance of the USD. The current total tonnage of gold with GLD is 791.88, with an estimated value of $32.311 billion. This is always a reliable barometer of movements in the gold price – increases are bullish and decreases are bearish.