Growing uncertainty and volatility in emerging-market currencies is weighing on gold prices as the U.S. dollar index trades at session highs. In particular, the Argentina peso and Turkish lira have seen significant selling pressure. The peso is trading at historic lows against the U.S. dollar. The U.S. Dollar Index last traded at 94.75 points.
The economic uncertainty in Argentina is particularly acute as the government on Wednesday asked the International Monetary Fund for an early release of a $50 billion loan. Currently the peso is down 45% on the year against the U.S. dollar. Many international investors are worried that Latin America’s third-largest economy could default on its significant government debt.
With renewed interest in the U.S. dollar, Comex gold futures have been pushed to session lows as it hold support at $1,200 an ounce. December gold futures last traded at $1,206.30 an ounce, down 0.42% on the day.
In the cash market, gold dropped below critical support; gold prices on Kitco.com show the metal last trading at $1,199.70 an ounce, down 0.55% on the day.
Bart Melek, head of commodity strategy at TD Securities, said that while gold has seen a few positive sessions, the precious metal will struggle as long as there is a bid behind the U.S. dollar.
“Until the U.S. dollar starts moving materially lower, gold prices will struggle to push past $1,200 an ounce,” he said.
Not only is the U.S dollar strength hurting gold but analysts noted that central-bank activity could be weighing on the precious metal. Melek said that he suspects some emerging-market central banks are swapping gold for U.S. dollars, to get important credit and support their domestic currencies.
Phillip Streible, senior market analyst at RJOFutures, said that he also expects that some central banks are selling their gold to shore up their currencies.
Although gold futures are holding important support, Streible added that gold investors were dealt a big blow earlier this week after prices were unable to break through initial resistance at $1,220 an ounce.
“I think we are seeing some investors give up on gold after it failed to break out,” he said. “This latest sell-off suggests that we are headed back below $1,200 an ounce.”
Streible said that there are also reports that most South American commodity producers are aggressively selling their products to raise U.S. dollars to avoid a potential currency crisis. He explained that this aggressive commodity selling will weigh on gold and the general market.
Streible added that the key level to hold is $1,189.
“If we fall back below $1,200, then investors better hope and pray that their life vest at $1,180 holds because if that breaks, then the Titanic is going down,” he said.
Although gold prices could struggle in the near-term, Melek said that this EM volatility could ultimately be bullish on gold. He added this uncertainty could force the Federal Reserve to halt its monetary policy tightening.
“Monetary policy not just in the U.S. will have to respond to the global uncertainty and that will be positive for gold,” he said. “I don’ think we need an obituary for gold just yet.”
By Jim Wyckoff
For Kitco News