Gold Gets Boost from Weaker Dollar and Falling Stocks

February Comex Gold prices rallied on Wednesday as investors reacted to the weaker U.S. Dollar and sharply lower equity markets. The catalysts behind the buying were investors looking for capital preservation rather than capital gain. Despite the strong rally, gold remained below its high made earlier in the month at $1113.10. Some investors said the lack of buying in Asia is one of the reasons why gold isn’t challenging this high.

Gold tends to rally when the U.S. Dollar weakens because of foreign demand. Since gold is dollar-denominated, a weaker dollar tends to make it more attractive to foreign traders. Additionally, a large sell-off in equity prices tends to be supportive for gold because stock investors use it as a hedge mechanism.

March Crude Oil futures briefly fell below $27.00, moving closer to the psychological $25.00 level. The global supply glut combined with bearish fundamental news helped drive down prices on concerns about demand.

Because of the bearish influence falling crude prices have had other commodities and equities, some traders would like to see a strong technical bounce at or near $25.00. Any long-term rally is not likely to take place, however, until there is a slowdown in shale production, which the Saudi strategy is trying to accomplish.

Additionally, the International Monetary Fund’s chief economist warned that global financial markets seemed to be over-reacting to falling oil prices and the risk of a sharp downturn in China’s economy.

This follows Tuesday’s comment by the International Energy Agency, which warned on Tuesday that the world could “drown in oversupply” of oil in 2016, with Iran’s exports piling into the excess.

Russia’s Lukoil’s chief executive Vagit Alekperov said, “Today, the oil industry is near a survival line…Unfortunately we are cutting drilling.” The private oil producer also said it expects the country’s output to drop for the first time in many years in 2016.

A report from Canada’s oil-sands producers said they were now losing money on every barrel, while U.S. shale producers “were just burning cash” at current prices.

The EUR/USD posted a two-sided trade on Wednesday before settling lower. The first rally was fueled by carry trade buying which tends to produce rallies when stocks break sharply. The eventual break may have been fueled by position-squaring or shorting into Thursday’s European Central Bank meeting. Traders may be expecting the ECB to emphasize the need for more stimulus.

The GBP/USD bucked the trend and rallied on Wednesday. The move was likely short-covering after a steep drop to multi-year lows. The current sell-off was fueled by falling crude oil prices which lowered inflation expectations while pushing the probability of a Bank of England rate hike into early 2017. Yesterday, BoE Governor Mark Carney said he had no timetable for raising rates and warned more damage would come from a slowdown in China.

In other news, the U.K. Average Earnings Index came in at 2.0%, slightly under the 2.1% estimate. The Claimant Count Change was -4.3K. This was bullish news since the estimate called for a 4.1K increase. The unemployment rate fell to 5.1%, lower than the estimate and the previous reading at 5.2%.

In U.S. news, building permits were slightly higher than the 1.20M estimate at 1.23M. Consumer inflation came in below expectations at -0.1%. Core CPI was also below the estimate at 0.1%. Traders were looking for 0.2%. Housing starts came in below expectations at 1.15M. Traders were looking for 1.19M.