Gold Remains Vulnerable

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A strong dollar without crisis is bad for gold.

Christopher-LemieuxSMBullion.Directory precious metals analysis 18 November, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Twitter @Lemieux_26

Historically, gold has been a go-to for times of financial uncertainty, whether deflationary or inflationary. Unfortunately, with the perception that central banks around the world will stimulate until growth shows up (hasn’t so far) and a global slowdown won’t turn into a global recession, gold will bare the brunt of hostility.

Gold has closed lower the last 14 of 15 days, and the yellow metal is currently trading lower ahead of today’s FOMC minutes. Traders will parse through rhetoric and formulate their own interpretation on whether the Fed will hike interest rates into a stronger dollar.

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As expected (no, really!), gold is trading a hair above $1,066 – a target posted in “Gold Lower as Traders Eye ECB Minutes.” Gold is so vulnerable to market perception that the common trope of gold to $1,000 is strikingly more likely, even as U.S. data continues to flash signs of a significant economic downturn.

If gold trends to a minor support target of $1,041, the weekly support of $1,035 is clearly the only thing between now and $1,000 per ounce.

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The dollar index has increased 23 percent since 2014, which still remains slightly lower than the 13-year high made earler this year. If the Fed exacerbates the strong dollar by hiking, the effects to the economy will be more pronounce. To note, Fed Vice Chair Stanley Fischer said during his speech last week that the effects of the strong dollar are lagging.

For instance, a prolonged 10 percent appreciate in the dollar would take a large toll on real exports. And that has already taken shape.

“Real exports fall about three percent after a year and more than seven percent after three years. The gradual response of exports reflects that it takes some time for households and firms in foreign countries to substitute away from the now more expensive U.S.-made goods,” said Fischer. You don’t say?

He continues to outline how bad a strong dollar really is, “the staff’s model indicates that the direct effect on GDP through net exports is large, with GDP falling over 1 to 1.5 percent below baseline after three years.”

So, in essence, Wall Street may get to rejoice soon enough on their crusade to $1,000 or below, but does that really matter when the economy is eroding and the strong dollar adds insult to injury?

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