Gold opened at $1977 on Monday, April 18th and this would mark the start of four straight weekly declines. As of 5:10 p.m. EDT on a gold futures basis, the most active June 2022 Comex contract is fixed at $1810.30, after factoring in today’s drop of $14.30, or 0.78%. Today’s gold decline came without the benefits of dollar strength. The dollar index is down 0.36% and currently stands at 104.515
The above image is a screenprint of the KGX (Kitco Gold Index) taken at 4:37 p.m. EDT. At this point, spot gold was priced at $1810.80 after factoring in a drop of $10.70. Market participants were active sellers, resulting in a price drop of $14.30. The weakness of the dollar provided a slight tailwind and increased the value by $3.60 (+0.20%).
This week’s drop was the strongest percentage drawdown in four weeks, down 3.87%. Considering that gold is down 8.44% over the past four weeks, almost half of that drop happened this week. This correction devalued gold prices by $167 an ounce, with $73 of that drop taking place this week.
Over the past four weeks, a major factor driving gold prices lower has been the strength of the dollar. The dollar has appreciated in value for the past six straight weeks. In the past four weeks of trading, the US dollar has gained 4.15%. That means dollar strength accounted for just under half of gold’s decline.
The dollar has traded in a defined range since early 2017. In January 2017, the Dollar Index opened at 102.80 and traded at a high of 103.78, marking the first time dollar strength at this level since 2003. The Dollar Index has traded at this level three times since 2017.
Both the 2017 high and the second instance, which occurred in March 2020, produced a double top. In both cases, dollar strength peaked at these levels, leading to a price correction that followed these highs. This month, the dollar not only challenged the highs made during the double top, but effectively closed above them on a daily, weekly and monthly chart.
The dollar index is down -0.36% today. However, the dollar posted a strong weekly gain. Currently the dollar index is locked at 104.515 and the last time the dollar was this strong was the fourth quarter of 2002.
Yesterday I touched on how recent price changes in the dollar and gold have made headlines based on fundamental events. Since technical studies are inherently lagging indicators, there is an inherent discrepancy. I was fortunate to be mentored by two great market techs, one of whom was Larry Williams. He told me a story that illustrated the flaw in using only technical indicators.
In short, a market technician is like someone standing at the stern of a boat and using the propeller wake to indicate the direction the ship was going. While it shows where the boat has been, only the captain knows when to turn the helm.
In this case, the Federal Reserve is at the helm, trying to steer the ship through a storm caused by rampant inflation.
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