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Gold Price Plunges 3% as Fed’s Repo Operation Ignites Dollar-Shortage Fears

Last Updated March 4, 2021 2:40 PM
Sam Bourgi
Last Updated March 4, 2021 2:40 PM

The price of gold was under pressure Friday, extending a weeklong slump that saw the U.S. dollar rise to multi-year highs against a basket of currencies.

Gold Tumbles; Silver Follows

Futures on December gold delivery reached a session low of $1,493.30, putting them on track for their lowest settlement in over a month. The contract was last seen at $1,504.60, having declined $10.60, or 0.7%, on the Comex division of the New York Mercantile Exchange.

Gold futures
Gold price unwinds from recent highs. | Chart: Bloomberg

Bullion is down more than 3% from Tuesday’s close of $1,540.20 an ounce.

Silver futures tumbled 32 cents, or 1.8%, to $17.59 a troy ounce. The grey metal has declined in each of the last four sessions.

The gold-silver ratio used by investors to determine when to buy and sell precious metals rose 1.2% to 85.45. That’s 85.45 ounces of silver to buy one ounce of gold.

Dollar Hovers Near Two-Year High

The Federal Reserve’s intervention in the overnight repo market this month has shined a spotlight on an apparent liquidity shortage in the financial system.

A cash influx to the tune of hundreds of billions of dollars sent a clear warning that the supply of U.S. currency wasn’t keeping up with demand. Some analysts have claimed that the so-called dollar shortage was behind the recent bitcoin price collapse, where investors liquidated their BTC holdings in favor of the greenback.

The Fed’s repo operation is just one of several potential explanations for the dollar’s resurgence. More obvious ones include the recent slide in competitor currencies like the euro and pound. European currencies are under renewed pressure over Brexit and the apparent slowdown in regional growth. So far, two major European economies – Britain and the United Kingdom – have contracted this year.

The U.S. dollar index, a broad performance measure of the greenback against six major rivals, held steady at 99.10 on Friday. DXY peaked at 99.37 on Thursday, its highest in two years.

In economic data, U.S. durable goods orders rose unexpectedly in August, a sign that factory demand was slowly returning. Orders for manufactured goods meant to last three years or more climbed 0.2%, the Department of Commerce said.

Personal incomes climbed 0.4% in August, matching forecasts, while personal spending increased less than expected at 0.1%.

The core personal consumption expenditure (PCE), the Federal Reserve’s preferred measure of inflation, edged up 0.1% on month and 1.8% annually, official data showed.