Gold Showing Some Resilience in The Face of Stronger Dollar, Higher Yields

(October 25, 2017 - by Neils Christensen)

Although gold has fallen below key resistance, one market analyst said that he sees some underlying strength in the marketplace as the metal holds above important support levels.

“I am surprised that gold is not lower. In the current environment gold prices are holding up well,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Hansen noted that there is a long list of factors weighing on gold: the U.S. Dollar Index holding near a two-week high, 10-year real bond yields trading at a three-month high and stocks remain near record levels on strong corporate earnings.

Despite these bearish factors, gold has managed to hold above the October lows at $1,262.80 an ounce. “Something is going on in gold and it’s more than just what the headlines say,” he added.

December gold futures last traded at $1,277.20 an ounce, down 0.29% on the day.

Something strange is going on in the financial system. And according to The Wall Street Journal, it’s causing some investors to move massive amounts of money out of the banking system.

Hansen said that geopolitical uncertainty, especially in the White House could be a reason why investors are reluctant to let go of their gold. While the Senate has passed important budget legislation, paving the way for Donald Trump’s much touted tax reform and tax cuts, the bill still has to be reconciled by the House.

“We really aren’t any closer to tax cuts but the market is gearing up for that. We could some disappointment if it doesn’t happen and that would be good for gold,” he said.

At the same time, The White House is also preparing to release its nomination for a new Chair of the Federal Reserve. One of the front runners is believed to be Stanford economist John Taylor, who markets are expecting to take a more hawkish stance on monetary policy. This is helping to support the U.S. dollar.

However, Hansen said there is uncertainty surrounding Taylor’s potential nomination. He also noted that any new leader at the Fed will have a difficult time altering the current path of interest rates.

“I think the Fed is starting to realize that inflation is not going to happen anytime soon and that will restrict the Fed’s decision,” he said. “The natural level of interest rates is lower than in previous cycles.”

As to how to play the gold market, Hansen said that current levels could be a good buying opportunity but warned investors to keep tight stops on their trades.

“If you are long gold then you should probably look at a stop around the $1,250 level. If gold falls to the $1,260 level then there is a good chance prices break below $1,250.”