Blame It On Oil and Germany

What’s causing the latest drop in gold prices? You can blame it on the resurgent U.S. dollar, falling crude oil prices, and the latest batch of economic data in Germany. The latest data coming out of the biggest Eurozone economy points to a contraction of second quarter gross domestic product (GDP). This data was critical because it compelled foreign exchange traders around the globe to shift their focus and dump the euro last week.

A big drop in crude oil prices is another major factor lending support to rising stock values since mid-July. As inflationary pressures continue to ease, the market has begun to discount the possibility of a quick economic recovery in the United States later this year.

Lower commodity prices act like a tax cut for consumers. These lower prices reduce the coast of living and allow consumers to spend more disposable income to non-energy and food items.    

The dollar, of course, had been heavily oversold for months. Since peaking just north of 1.60 euro, the greenback has rallied an impressive 6.5% since early July.

In Europe, economic growth is now slowing sharply following the release of second quarter German GDP, which showed a contraction. Along with other stumbling economies in the Eurozone, the European Central Bank (ECB) is unlikely to keep raising interest rates this year - especially if oil prices continue to decline.

That makes U.S. dollar assets more attractive for prospective investors because Europe is behind the United States in the economic and credit cycle.