Rough Week for Gold – More to Come?

Suffice to say it’s been a rough week for gold and gold mining stocks. With economic indicators and Federal Reserve officials pointing to higher interest rates at the upcoming Federal Open Market Committee (FOMC) meeting next week the US dollar index has firmed appreciably, putting downward pressure on gold.

U.S. Federal Reserve

Lending support to an interest rate hike, the ADP jobs report on Wednesday beat economists’ estimates by more than 100,000, pointing to a further reduction in the unemployment rate which is higher interest rate positive. The next major data point coming up is the official U.S. non-farm payrolls report on Friday.

Perhaps seeking to take some if not all the credit, President Trump tweeted that January and February “were the strongest consecutive months for hiring since August and September 2015.”  At least some of the employment gains were in the oil and gas industry where hiring in Houston, Texas was the strongest in more than two years. According to LinkedIn, the hiring rate in Houston is up 24% since September 2016.

In the meantime, oil prices have been falling, reflecting perhaps some cheating on the part of OPEC members who had agreed to constrain global output to boosts prices. Exxon recently announced plans to divert about one-third of its drilling budget this year to U.S. shale fields because they tend to be a rapid source of cash flow. That decision supports the hypothesis that the shale oil boom in the U.S. is not over and any oil price increase will likely be met by new shale production which at the bare minimum would tend to cap prices.

Following a rise in domestic inventories crude oil prices fell on Wednesday after U.S. stockpiles reportedly climbed by 8.2 million barrels of crude in the past week – four times what analysts expected. That too might have hurt gold prices because of its perceived deflationary impact on the broader economy.

While some analysts believed the probable rate hike was baked into the gold price already, market action this week suggests otherwise and we could see further weakness until the Fed decision is announced next week. Fasten your seat belts as the rough ride is probably not over yet.

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