Why Does the Gold Price Keep Dropping After Every Bullish Move?
The gold price has shown signs of life over the past few weeks. It has risen and fallen, even going above $1,240 per ounce, only to drop back toward what we can establish as the current floor price of $1,200 per ounce.
Before we consider the basics and analyze the strange fluctuations in the price of gold—by “strange,” read “bearish”—I believe the main problem has a name.
Or better, it has two names: the U.S. dollar and Brexit (and maybe Italy as well).
Gold found some solid support for $1,220 or higher for a few weeks when the euro was catching up, ever so slightly, to the dollar.
iStock.com/Nicholas Wright
Pavlovian Investors
Because many investors these days tend to act according to Pavlovian logic, rather than analysis, they reject gold because the dollar is high. The textbooks say that’s what’s supposed to happen.
But, as usual, reality is more nuanced, and more often than not it breaks the orthodox patterns.
The euro, the dollar, and the gold price now are breaking all patterns. They are establishing new ones because we’re in the midst of a rare and significant shift.
After moving a little higher, the EURUSD exchange rate has moved back in favor of the dollar.
At first, supported by apparent progress in the Brexit process, the recent resignations of four ministers from the British government over its controversial Brexit plan sent shockwaves through Westminster. How long before U.K. Prime Minister Theresa May also resigns?
But more significantly, and almost ignored in the myopic news cycle in North America, the increasing isolation of Italy from the European Union—rivaling Greece in 2014—has dealt the euro a severe blow.
And what does all this have to do with the price of gold?
Consider the Euro
The weak euro makes the dollar appear stronger—and in turn, it makes the gold price weaker.
