The precious metals markets were trading slightly lower the day after Israel began a ground operation in Lebanon and Iran responded with a barrage of 180 ballistic missiles that failed to kill any Israelis. One Palestinian civilian was killed in the West Bank, according to the Israeli Defense Force.
Gold traded around the $2,650 an ounce mark, down about $9, while silver remained relatively flat at $31.46.
Blue Line Futures Chief Market Strategist Phil Streible said he believes gold’s relatively small move upward amid the massive rise in tensions could be due to a strengthening U.S. dollar in reaction to the events.
The dollar-gold correlation amid tensions
Streible noted the Euro’s weakening in response to Tuesday’s increase in violence.
“The Euro currency did sell off aggressively and the dollar index caught that bid,” he said. “And I think that’s what put the cap on the gold market.”
Gold prices are often inversely correlated to the dollar as most commodities tend to be, however, Streible noted there are certain times when both the currency and yellow metal can appear to be a safe haven to investors, and Tuesday was likely one of those days.
“December gold is (now) down to $2,672 and that could present some opportunities to enter into that trade,” he said.
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Inflation talk is starting again
After a blockbuster Federal Reserve meeting that ended with a cut of 50 basis points, Streible said a recent strike of 50,000 port workers from Maine to Texas could result in rising commodities prices.
“Remember, if you have these problems where we’re not able to bring in additional materials, the commodities located in the U.S. or closely abroad should go up in price,” he explained. “What does that do? It pushes inflation upward. What’s that do? That pushes fed expectations for larger interest rate cuts down.”
According to the most recent update of the CME FedWatch tool, traders are pricing in a 65% chance of a 25 basis point cut and a 35% chance of a 50 basis point cut at the upcoming FOMC meeting on Nov. 7. Just one week ago, traders were chancing in a 57% chance of the larger interest rate cut.
“Gold futures need more accelerated interest rate cuts,” Streible said. “We need to see a deeper cut down to the terminal rate. Does (what’s happening with the port strike) raise the terminal rate?”
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