It sure looks like it is. It all comes down to interest rate differentials in my view. The US, out of the big three, the Euro Zone and Japan, is the only economy where we are even talking about higher interest rates. The other two are not there yet as growth is stagnant at best in those economies. Please do not misunderstand what I am saying here – I am not saying that interest rates here are going to rise anytime soon. I am saying however that if and when rates finally do begin to rise, traders are convinced that they will do so FIRST here in the US.
Today’s Construction data reminded currency traders of that fact.
Yesterday I mentioned that stubborn band of overhead chart resistance that has served to keep the Dollar’s upward progress in check. Today it finally blew right through that!
The ramifications for the commodity complex in general are all too well known by anyone who has been watching the markets over the last few years. Higher Dollar tends to equal Lower Commodity prices overall.
We are seeing that in the Goldman Sachs Commodity Index which continues to get pummeled lower. It just missed setting a fresh TWO YEAR LOW in today’s session especially with crude oil being obliterated. Crude has not been at these levels this year since the third week of January!
I think it bears repeating – were it not for geopolitical tensions in Ukraine, it is highly doubtful gold would be able to withstand this outside pressure. Gold needs an environment in which REAL rates are either flat or negative as there is very little opportunity cost to hold the metal under such circumstances. However, in an environment in which interest rates are likely to rise, and rise at a clip that will keep them above any incipient rate of inflation, gold is going to experience obstacles to a rise in its price level. Investors/traders are not going to lock up precious capital in an asset that throws off no yield and one that many do not see as necessary given the current lack of inflationary pressures.
Gold bulls will need to be cautious therefore and alert to any signs that geopolitical tensions surrounding Ukraine might be lessening. So far we are not seeing any drastic outflows from the GLD, ( not that its current levels of holdings are anything to be the least bit excited about ) but if we do begin to see such an occurrence, it will not augur well for a stronger gold price moving forward.
Based on the current data that we have, gold demand has been dropping off somewhat from last year’s torrid pace. If investors begin to more largely embrace the higher interest rate scenario, that is not going to help it.