Gold Prices Dip After Perfect Storm of Downward Pressure

Wednesday, October 25, 2017

The price of gold is dependent on a number of factors like the U.S. dollar, the strength of confidence in the U.S. economy, and the prospects of the Federal Reserve’s future policy. Recently, gold hit three-week lows thanks to all of these factors putting downward pressure on the yellow metal: new records in the stock market, confidence that the Fed will strengthen the dollar, and elevated treasury yields that still provide a head from the market. In this environment, we’ve seen gold stick under $1,300 per troy ounce down to the $1,275 range. But are there signs that this is just a dip for the yellow metal?

Putting Gold Price in Its Context

Any time one wonders at a gold “dip,” it’s vital to examine the factors that influence this dip—especially the context in which the gold price decline occurs. Courtesy of MarketWatch, here are the latest numbers in visual display:

gold price chart

Over the past month, you’ll see that gold’s context puts it in about this $1,275 range, which is why it’s not too surprising to see it return to this level after all of the factors mentioned above converged in the news. The boost above $1,300 appears more the outlier here, except that gold ascended to $1,350 in September. When it comes to the relative value of a price, context is everything—and there’s plenty to see here that suggest it may be another gold dip that suggests opportunity.

China Threatening to “Dethrone” the U.S. Dollar?

One of the strongest factors mentioned above is the value of the U.S. dollar. The strength of today’s U.S. dollar is largely dependent on its usefulness worldwide. As the major reserve currency, the U.S. dollar has high demand thanks to international business transactions as well as usefulness in the American economy. According to the SchiffGold blog, China is making moves toward gold, which would move power out of the U.S. dollar and more demand for the yellow metal, which suggests that Wednesday morning’s lax gold price is actually a bargain in this kind of international currency environment.

Watching the U.S. Dollar

Speaking of that U.S. dollar, we see an overall correlation of weakening in mid-October to help boost gold’s value in the middle of the month, which isn’t surprising given the history between the dollar and gold. Every month seems to demonstrate the powerful relationship between the dollar index and the price of gold, and October is no exception. That’s why it’s worth watching when nations like China move to make their own currencies and economies even more independent of the United States. If other countries start settling more transactions with their own strategies, it would suggest that a weakening in the dollar could take place, which once again makes gold a strong hedge.

Whether gold moves back above $1,300 again soon is less relevant than how investors see these other factors converging on precious metals. Will the stock market continue to break records and will the dollar remain this strong? Those who believe they need a hedge may have a bargain on their hands in gold.

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.