Gold has sold off on balance for six weeks as the US Dollar Index climbed on Fed-rate-hike odds and Treasury yields. The analysis argues those drivers look stretched and could turn in gold's favor.
Gold is in a six-week slide, and the analysis behind this story blames the US dollar. Surging Fed-rate-hike odds and longer-bond yields fueled the dollar's climb since late August, which mostly drove gold's selloff since then, according to the author.
On Wednesday, gold fell 1.4% to a fresh correction low of $4,107 while the USDX rallied 0.4% to an 18.0-month high of 102.3. Over the six weeks, the USDX gained 3.4% and gold dropped 12.0%, the analysis says.
A hawkish Fed and rising yields lift the dollar
The turn began after Kevin Warsh, Trump's new Fed chairman, gave a hawkish speech at Jackson Hole. Gold plunged 3.1% that day, and futures-implied odds of a 25-basis-point rate hike at the mid-September FOMC meeting rose from 35% to 57%.
The Fed then hiked 25bp, its first hike in 3.1 years. A week later, 10-year Treasury yields surged to 5.10%, a 19.2-year secular high.
Futures leverage amplifies the dollar link
The author says gold futures traders watch the dollar closely because of leverage. Midweek, a 100-ounce contract controlling $410,690 of gold required $20,677 in margin, which allows leverage up to 19.9x.
Positioning has thinned as well. Speculators' long contracts fell to 298.5k, the lowest since early August, which the analysis reads as room to buy again.
The case for a dollar reversal
The analysis points out that the USDX has hit its uptrend's upper resistance, which has held three consecutive times over the past year or so. If the dollar stalls there, the author says technically-oriented currency traders will likely be quick to sell.
Investment demand offers a second support. The combined bullion holdings of the GLD, IAU and GLDM ETFs rose for 12 consecutive CoT weeks, averaging +6.0t weekly. If the dollar rolls over, the author argues, gold could stage another August-style surge.
Source: Commodities Analysis & Opinion
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