Home > Gold rally fades as US dollar reaches 16-month high

Gold rally fades as US dollar reaches 16-month high

Gold sellers emerge in the aftermath of Powell’s renomination. The dollar surged to a 16-month high, ripping higher across financial markets. 

The price of gold failed at $1,880 once again, and it is back into a long-term consolidation range. Yesterday’s renomination of Jerome Powell for a new mandate at the top of the Federal Reserve has triggered another leg higher in the US dollar. The greenback reached a 16-month high, literally ripping higher and gaining against its peers and against precious metals.

A lot of focus was on the $1,900 area and a market reaction was expected. A daily close above the level would have meant that the series of lower highs is broken, thus changing the bias from bearish to bullish.

However, the market failed at doing so, and now it is back below $1,800. The next levels of interest are found in the $1,720-$1,680 area, where the price found support several times throughout the year.

With only a few days until the Thanksgiving holiday in the United States, there are slim chances for the dollar’s rally to abate. Therefore, if anything, we should expect further dollar strength toward the end of the week and, thus, the pressure on the price of gold to remain.

Bank of America keeps its bullish bet for the price of gold

Despite the numerous failures to break higher, Bank of America continues to have a bullish recommendation for the price of gold. It sees the price of gold well above $1,900 next year and to cross the $2,000 mark in 2023.

It all makes sense if we consider the US inflation rate and the inflation expectations for the period ahead. However, the markets move based on other factors, which are not necessarily the most obvious ones. For example, at the end of 2020, literally, every investment house had forecasted a lower US dollar for 2021. So far, the dollar is ripping higher, reaching a 16-month high and rising.

Another thing that might affect the price of gold is the inverse correlation between gold and bond yields. Both gold and Treasuries are considered safe-haven assets, so they decline or rise in price together. Thus, the negative correlation with the bond yields tends to intensify in periods of economic recovery.

To sum up, the pressure on the price of gold is not fading away as long as the dollar keeps rallying and yields are rising.

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