FX.co ★ Gold cannot withstand the onslaught of a strong dollar

Gold is falling in price on Thursday amid a rising dollar. Judging by the rise in US currency quotes, investors reacted with enthusiasm to record inflation data in the US.

So, in the morning hours of the European trading session, the price of the August gold futures on the New York Comex exchange fell by 0.52% to $1,726.45 per troy ounce. By 14:50 GMT, the quotes had already fallen by 2.23% to $1,696.85. Silver by this time managed to decline by 5.61%, to $18,117.

At one point the August gold futures were at $1,704.28.

The dollar index, or its exchange rate against a basket of six other currencies, rose 0.96% today, reaching 109.03 points. A stronger dollar makes gold less affordable when buying in a different currency.

The yield on 10-year US Treasury bonds is 2.982%. The yield curve of 2-year and 10-year Treasury bonds remains inverted and the most inverted over the past 22 years. This indicates an approaching economic recession.

In addition, another inflation report was published on Thursday, which made a lot of noise and caused a storm of emotions among traders. According to the data, in June, annual inflation in the United States rose to 9.1% in annual terms (it was at the level of 8.6% in May). This June figure was the highest in the United States since November 1981.

Obviously, in this scenario, the Federal Reserve is forced to keep its finger on the pulse of aggressive tightening of monetary policy. According to the CME Group, almost 82% of analysts are confident that at the July Fed meeting the discount rate will be significantly increased – immediately by 100 basis points, that is, to the level of 2.5-2.75%. By the way, before these data were released, about 91% predicted a rate increase of only 75 basis points. It just so happened that the increase in the US rate (and even expectations of its increase) has a very beneficial effect on the exchange rate of the US national currency, but for the demand for gold, this news can be called negative.

A significant difference in interest rates in large countries (they are higher in the US) leads to the spread of the so-called Carry Trade, when international traders and institutions exchange their own currencies for possession of the US dollar. As history shows, this phenomenon can persist for quite a long time, which once again will only strengthen the dollar.

The strong drop in crude oil futures prices this week is also a factor reducing the prospects for gold. NYMEX futures dropped overnight to the lowest level in the last three months – $93.24 per barrel. January crude oil futures are trading at $84 per barrel. This indicates that the market is confident that crude oil prices will decline in the coming months. The fall in the cost of crude oil contributes to a decrease in the value of assets in other commodity markets. Such a noticeable weakening of the commodity sector is an important early sign that inflationary pressure has already reached its peak.

So, we are seeing an increase in bond yields, a rise in the dollar, while a noticeable drop in crude oil prices. Obviously, these are all clearly bearish elements that are working against bulls in the metals market today. In addition, investors' fears about the recession in the United States are growing stronger and there is a decline in consumer and commercial demand for metals.