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James Hyerczyk
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Gold Bars and Dollar

Gold is drifting lower on Tuesday shortly before the regular session opening. Prices are also trading below last Friday’s close which indicates buyers weren’t too impressed by the weekend’s events including Theresa May’s resignation, potential Brexit turmoil, the EU parliamentary elections and Trump’s trip to Japan.

Treasury yields are falling again overnight and stock prices are a little softer, but gold buyers don’t care because their focus is on the U.S. Dollar and its battle against a basket of currencies, namely the Euro.

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If you’re new to my writing then I just want to point out that due to the weighting in the U.S. Dollar Index, I contend that it is essentially the Euro. A 57% percent weighting can go a long way in influencing the direction of an index. The index doesn’t even include the Australian and New Zealand Dollars so it isn’t much of a representation of the true value of the dollar.

That being said, at this time, the main focus for gold traders should be on two things, the direction of the Euro and signs of a weakening U.S. economy that could lead to a U.S. Federal Reserve rate cut later in the year.

Conditions may be brewing in Italy that could send the Euro sharply lower. A problem with their handling of debt is once again causing jitters in the Euro Zone. The lesson learned years ago from the Greece financial crisis is to sell Euro first and ask questions later. We haven’t reached that point yet, but where there is smoke, there is fire.

A weaker Euro would drive up the U.S. Dollar Index and gold prices will likely fall along with the single-currency.

Secondly, signs of a weakening U.S. economy will weaken the U.S. Dollar because they will force the Fed to once again change policy, but this time, it will not say to remain “patient” or rates will remain steady for “some time”. This time around, policymakers will hint at a rate cut. This should weaken the dollar and gold should pop to the upside.

We saw on May 23 what a bad report could do to the U.S. Dollar and to gold prices. This week, we have GDP, but next week we have the non-farm payrolls report. The Fed is watching the labor market and inflation for cracks so the jobs report could be a market moving event.

Keep an eye on the events out of Europe like the European Central Bank decisions and comments from ECB President Draghi. And watch the U.S. reports on labor and inflation because they will affect the next Fed decision.

If the Euro and the U.S. Dollar remain rangebound then gold will remain rangebound. Continue to be patient.

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