Metals Stocks: Gold prices jump as dollar weakens, ‘risk off’ mood dominates

The U.S. dollar, which has been cited as a catalyst for moves in metals markets this year, was lower, down 0.9% to 104.165, according to the ICE U.S. Dollar Index
DXY,
-1.49%.
Still, although the dollar’s value weakened slightly on Thursday, it remained near its strongest level in about 20 years against a basket of its main rivals.

Price action

• Gold
  GCQ22,
  +1.89%

  GC00,
  +1.89%
  for August delivery was up $20.80, or 1.1% at $1,840.40 an ounce on Comex

• July silver
  SIN22,
  +2.36%

  SI00,
  +2.36%
  added 28 cents, or 1.3%, at $21.70 an ounce.

• July platinum
  PLN22,
  +2.87%
  climbed by $18.90, or 2%, at $943.50 an ounce.

• September palladium
  PAU22,
  +1.32%
  was up $11.70, or 0.6%, at $1,846 an ounce.

• July copper
  HGN22,
  -1.43%
  traded at $4.066 a pound, down 9.75 cents, or 2.3%

What analysts are saying

Jim Wyckoff from Kitco said that “risk averse is keen late this week.” U.S. stocks traded sharply lower, with the Dow Jones Industrial Average
DJIA,
-2.15%
falling more than 600 points.

As was the case with stocks and bonds, analysts mostly described the price action in gold as a reaction to the recent moves from central banks.

Despite Thursday’s relief rally, the “gold price is maintaining its downward trend for the past number of days as traders and investors believe that the Fed is determined to bring inflation under control,” noted Naeem Aslam, chief market analyst at AvaTrade. “However, the Fed has made it clear that their policy is data dependent, and today’s data has once again confirmed that more weakness is coming for the U.S. economy.”

Among U.S. economic data released Thursday, housing starts plunged, while applications for unemployment benefits in the U.S. remained near their highest level in five months.

The Fed’s decision Wedmesday prompted more opinions that the central bank would eventually “get the Fed funds rate up to 5% or even 6%, and indeed the Fed funds futures are indicating a 4% rate,” said Brien Lundin, editor of Gold Newsletter.

“But these predictions fail to do the simple math of applying those rates against $25 trillion of federal debt owned by the public, which would yield annual interest payments in the $1 trillion to $2 trillion range. I believe annual interest payments of that magnitude will be politically impossible, and stand as the barrier to the Fed’s fight against inflation,” he told MarketWatch.

Given that, “if the markets don’t force the Fed to reverse by early fall, I believe the oncoming debt-service tsunami will,” Lundin said. “Thus, the Fed will ultimately prove powerless to control inflation, and this will be extremely bullish for gold and silver over the longer term.”

Gold hasn’t always been the best “risk off” hedge during this year’s stock-market rout. That title has instead gone to the U.S. dollar. And following the Swiss National Bank’s decision to hike its benchmark interest-rate by 50 basis points, Deutsche Bank’s George Saravelos noted that he sees the Swiss franc as “the best hedge against global stagflation”. The franc
CHFEUR,
+1.79%
was up more than 2% to trade at just under one euro.

For now, gold traders are looking for clues as to when and where interest rates from the Fed will top out, and the U.S. dollar index is also “heavily over-bought,” Chintan Karnani, director of research at Insignia Consultants, told MarketWatch.

Looking ahead, Karnani said his focus is on whether there will be interest rate hike after the July meeting. Gold should “form a medium-term bottom by the end of July if there are no interest rate hikes after the July meeting for the rest of the year,” he said.

Meanwhile, a team from JPMorgan blamed the drop in industrial metals prices like copper on the fact that Chinese demand has been “fragile so far with continued mass testing and more-targeted recent restrictions in Shanghai and Beijing stirring fears of a backslide on the COVID front.”