Analysis: Gold’s October pressure caused by stronger dollar
Gold prices show strength by trading flat amid dollar rally while some investors get skittish of momentum change
October’s start to precious metals trading may give some investors room for pause, especially as gold is off to its worst start to a month since February. However, rising geopolitical tensions and a continued strengthening of the dollar have led some experts to suggest a double safe-haven effect — where investors turn to both gold and the U.S. dollar — has killed momentum in the gold market.
Gold for December delivery was trading at a flat $2,661 in early COMEX trading Tuesday, while silver was down nearly 2%, trading under $31.50 an ounce.
Not all that glitters is gold
While gold is off to one of its weakest monthly starts of the year, the dollar is forming one of its most impressive. Since Oct. 1, the Dollar Index (DXY) has gained 1.7% to 102.6 and is up more than 2.4% since recent lows made at the end of September. This is one of the most significant moves the dollar has made to the upside since April, after which a long downtrend began.
The movement came on the heels of rising tensions in the Middle East amid an Iranian missile attack on Israel and market anxiety resulting from Prime Minister Benjamin Netanyahu’s vow to retaliate.
This trend of seeing the U.S. dollar strengthening amid geopolitical concerns shows that while BRICS nations are approaching de-dollarization and attempting to circumvent the use of the U.S. dollar globally, the economic alliance has a long way to go to dethrone the world’s reserve currency.
So what does this mean for real gold?
The stronger dollar appears to have stalled gold’s relentless rally that seemingly made new all-time highs each month throughout 2024. But, of very important note, gold hasn’t surrendered any of its gains. While the dollar is up well over 2 % in the past 10 trading sessions, the yellow metal has traded notably flat — gaining just 0.08% in October trading thus far.
When the currency that a commodity is priced in has risen quickly, gold investors should consider that the metal’s reluctance to drop is showing a sign of strength far beyond typical resilience.
The more volatile metal, silver, has not shown the same resistance to a strengthening dollar that gold has shown thus far in October. Silver is trading down about 0.3% since Oct. 1 as the dollar has gained 1.7%.
The market is taking tensions seriously
While it may be easy to dismiss some of these moves as minor, which certainly is the case for gold’s very flat performance in October, there are some signs that the market is very seriously monitoring the geopolitical tensions in the Middle East.
The CBOE Volatility Index (VIX), commonly called the U.S. market’s “fear index,” has rapidly risen since Oct. 1, gaining more than 6.6 to trade at 22.03, a 38% gain in just six trading days.
This movement does a lot to support the theory that the move into the dollar is safe-haven related, and gold’s resistance to that move shows similar sentiment.
But not all experts are convinced that gold’s seemingly endless ability to make new all-time highs is on pace to continue.
In an interview with Kitco News, DeCarley Trading co-founder Carley Garner said her bullish outlook on the yellow metal is beginning to wane.
“No matter how bullish the fundamentals are, if everyone is already long, the market will eventually run out of buyers,” she told Kitco. “I think the market needs a reset as it looks for a new narrative.”
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Interest rate fluctuation also shrugged off
Gold is also showing notable resistance to the changes in sentiment provided by swaps traders in the treasury markets. On Friday, the U.S. released a jobs report that surpassed all expectations, especially given the Federal Reserve’s most recent vow to prevent a softening job market in the face of potentially rising inflation.
Almost instantaneously, traders moved away from the sentiment that another larger half-point interest rate cut could be on the horizon and instead bet heavily on the odds of a quarter-point cut at the upcoming FOMC meeting in November. In theory, this change in sentiment should have been bearish for gold, but as previously noted, the yellow metal is slightly in the green for October despite the changes.
The rally has stalled, but all signs are great
Given these factors, it’s clear that gold’s shift away from upward momentum is to be expected and its ability to hold ground amid several headwinds should be strongly noted.
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