The American dollar slightly rebounded against the euro, which reduced the appeal of gold as an alternative investment.
Gold, being negatively correlated with the American dollar, has been gaining value during the last month as the greenback declined against the major currencies. Prices of the yellow precious metal increased from $642 in mid-August to $714 per troy ounce on September 12th. The recent decline to $704 was mainly caused by the situation on the USD market. The euro retreated from the 1.3926 all-time high against the greenback it achieved on Thursday to 1.3860.
The dependence of gold to the EURUSD market is very close. While the euro has gained 5.1% this year, gold advanced 11.0%. When the dollar finally rebounded against the euro, investors keeping their cash in gold were under pressure. Higher oil prices also have their effect on gold. The price of a barrel of Brent oil declined yesterday to $76.15 from Wednesday’s $77.85.
Prices of gold are driven by swings of the American dollar. The recent weakening of the greenback, which pushed prices of gold over $710 per troy ounce were caused by expectations of investors the Federal Reserve System will cut interest rates in the US by 25 basis points on its September the 18th meeting. If the Fed decided to decrease the federal funds rate by 50 basis points to 4.75%, it will further weaken the dollar opening the gate for gold to attack its all-time high at $730 from May of 2006.
From a technical analysis point of view, gold is close to the $700 support level. If it rebounds from it, the path for higher prices will stay open.
Adam Narczewski
X-Trade Brokers Dom Maklerski S.A.
adam.narczewski@xtb.pl