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Gold Price Tumbles as Signs of Pervasive Dollar Shortage Emerge

Last Updated September 23, 2020 1:06 PM
Sam Bourgi
Last Updated September 23, 2020 1:06 PM

The price of gold tumbled on Monday and threatened to slip below $1,500 an ounce after the precious metal became more expensive for holders of foreign currencies.

Under normal circumstances, dollar-denominated gold and other precious metals tend to fall when the greenback strengthens.

Gold Price Tumbles; Silver Follows

Futures on December gold tumbled all the way down to $1,501.20 a troy ounce on the Comex division of the New York Mercantile Exchange. The contract was last down $8.20, or 0.5%, to $1,504.70.

Gold price
The price of gold tests the lower range of $1,500 on Monday. | Chart: Bloomberg

The yellow metal is down 4% from its September high of $1,566.20. Trading conditions have been choppy for the past month, with a peak-to-trough range of nearly $50.

Silver prices were also down on Monday, with the December futures contract hitting a session low of $17.44 a troy ounce. The grey metal last traded at $17.55, having declined 0.4%.

Dollar Strengthens

The U.S. dollar rose against a basket of currencies Monday, as traders continued to dissect the latest batches of labor market data and their implications on monetary policy.

The U.S. dollar index (DXY), a weighed average of the greenback’s performance against six rival currencies, peaked at 98.99. That’s roughly half a percent shy of last month’s high.

Safe-haven bullion tends to outperform the market during periods of heightened political and economic turmoil. On Monday, it failed to catch a bid even after China all but slammed the door on the possibility of a comprehensive trade agreement being finalized this week.

Since gold moves inversely with the dollar, a stronger greenback could limit subsequent rallies for the precious commodity. Activity in the repo market, combined with what appears to be a global liquidity crisis, suggest U.S. dollars could be in high demand in the short term.

The rise of fractional reserve banking has given financial institutions the ability to print dollars out of thin air, thereby creating massive demand for the U.S. currency. Since the Federal Reserve doesn’t have jurisdiction outside the United States, it cannot create more dollars to satisfy the artificial demand being spun out of global markets. If the trend continues, the global banking system could see an acute shortage of the U.S. currency – at least, in the short term.

A stronger dollar that is more expensive to convert into could limit foreign appetite for gold, which is priced in greenbacks on futures markets.

On the flip side, demand for bullion is likely to remain steady due to other countervailing forces, such as central-bank stimulus, weakening global growth and an overpriced stock market. The inability of China and the United States to reach a new trade deal by the end of the week could also serve as a positive trading catalyst for bullion.