Gold Price And Oil Finding Leverage From A Weakened Dollar

Wednesday, October 19, 2016

gold bar

It’s no secret to investors that the gold price is heavily dependent on the state of the US dollar. The weaker the dollar is, the more it will take to purchase an ounce of gold. Often, investors take this fact for granted when considering the price of gold. But the week’s recent events have shown just how important the state of the US dollar is in predicting the future of gold prices.

Wall Street Journal Sees A Weak Dollar, But Possibility For Fed Rate Hike

In a recent article at the Wall Street Journal, Stephanie Yang and Ed Ballard pointed out that gold prices could thank the weakened U.S. dollar for pushing up demand from “foreign investors.”

“The US Consumer Price Index data put some pressure on the precious metal Tuesday morning, which rose a seasonally adjusted 0.3% from a month earlier,” wrote the WSJ. However, some doubt still looms for the price of gold with economic news slated to hit this week—with some expecting positive economic news.

That same WSJ report pointed out that the CPI, the Consumer Price Index, rose a seasonally-adjusted 0.3% from a month before. Whether or not investors want to interpret this data as inherently positive remains their prerogative.

Noting that positive economic data tends to keep gold down, the article then went on to quote Bob Haberkorn of RJO Futures, who believes that the Fed will take this economic news and run with it by December, potentially even raising interest rates.

What Do Oil Prices Have To Do With Gold?

It wasn’t just gold that saw a solid weak of performance thanks to a volatile U.S. dollar. Another important commodity, oil, has seen prices around the $50/bbl mark. With oil priced in gold, the dollar’s volatility simply goes to show how important the strength of this particular currency is to world commodity markets.

Daily FX, a Forex news and analysis site, also noted that Saudi Arabia has begun selling bonds, which “shows confidence in the oil market.”

Does this tie into confidence in gold, as well?

There are mixed signals here. On one hand, analysis like Haberkorn see an opportunity for the Fed to raise rates—potentially harming the prospects for gold prices at the end of the year. On the other hand, commodities like oil have shown signs of life. Though oil and gold do not necessarily go hand in hand, many of the same market factors do influence the price of both.

Where Gold Prices Go After Today

David Govett, a precious metals executive at Marex Spectron, was quoted by the Wall Street Journal as saying that a potential December rate hike may already be “priced in” to the market. He recommends to his clients that gold investors buy the current “dip.”

It’s a murky picture out there for gold - and mixed signals may have to wait for more economic data to give a clearer picture of where investors need to be. But if last week is any indication, gold prices can still make significant moves that affect investor confidence.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.