Dollar weakness adds to bullish market sentiment in gold resulting in a double-digit gain

As of 5:35 PM, EDT gold futures are currently up $17.70, a gain of almost a full percent, and fixed at $1865.50. Dollar weakness accounted for approximately one-third of today’s $17 gain. with the remaining increase attributable to market participants bidding the precious yellow metal higher. For the last 4 consecutive trading days, we have seen gold gain value. This since May 18 when gold traded to a low of $1805 and closed at $1815.

The US dollar index continued to weaken after hitting its highest value on May 13 when it hit a high above 104.50. Today the dollar index declined by 0.35% and is currently fixed at 101.74

In today’s report, we want to look at gold’s recent pivot in which dollar weakness played a key and critical role. We also want to express a possible explanation as to why market sentiment in the dollar pivoted from bullish to bearish. The dollar had been in a defined uptrend since June 2020.

 The recent sharp increase in dollar value was based upon that market sentiment was due to investors' focus on the Federal Reserve’s recent revisions and monetary policy. Changes by the Fed were attempts to bring down the spiraling level of inflation. This resulted in market participants taking yields in US treasuries substantially higher which resulted in extreme dollar strength.

Many analysts including myself believed that the current level of inflation is largely due to issues that higher interest rates cannot address such as supply chain bottlenecks that have been inherent and growing since the global economy came out of a severe recession and pent-up demand for goods and services that exceeded the ability of companies to satisfy those demands.

Since the only tool that the Federal Reserve has to affect levels of inflation is to contract economic growth by raising rates market participants at first focused on the net effect of higher interest rates. However, recently we have seen the pendulum swing in market sentiment in which yours been a shift from focusing on higher interest rates to focusing on higher levels of inflation and the distinct reality that the current level of inflationary pressures will be much more persistent than the Federal Reserve’s anticipated.

Therefore, we could see this shift in market sentiment continue if future inflationary reports do not indicate that inflationary pressures have peaked or indicate that inflation continues to move to higher levels.

Wishing you as always good trading,