Falling dollar, rising gold – where will that take us?

Here’s my latest article published on the Sharps Pixley website earlier today looking at the collapsing US Dollar and its impact on the gold price.  While gold is very definitely sharply higher in dollars, the fall in the dollar index means that in some other significant currencies – notably the British pound which finds itself at its highest level against the dollar since the Brexit vote a year and a half ago – the gold price may actually have fallen.

Dollar drops, gold soars as U.S. starts to lose control

If gold trading this morning in Europe is anything to go by, gold is headed for US$1,350 an ounce, and not before time.  But before non-U.S. gold-owning citizens get carried away with euphoria they should also be aware that the dollar index has dropped below 90 for the first time since early 2014 and the gold price in many other key currencies like the British pound (easily at its highest level against the dollar since the Brexit vote) the Swiss Franc and the Japanese yen, has actually fallen.  Silver though has been somewhat left behind with the Gold:Silver Ratio at well over 78, but we do anticipate, if gold stays in the high $1,340s, or breaks through $1,350, that silver will play catch-up.  It usually outperforms gold when the latter is rising sharply.

The performance of the dollar gold price level, though, does suggest that the big money into the gold futures markets, which had been successful in keeping the shiny yellow metal price down below $1,340, may be losing control.  It could thus see discretion as the better part of valour and allow gold to find a new top and then work hard again to keep it there.

The key though looks to be U.S. dollar strength and it remains to be seen whether the recent decline is an engineered one in an attempt to make U.S.-manufactured goods more competitive (a policy that had had been signalled by President Trump some time back – although since denied).  If so a dollar decline may have gained more steam than intended, as these things do.  On the face of things the U.S. economy is in a decent growth stage, unemployment is at a low level – both things that might normally lead to dollar strength, not weakness.  But perhaps massaged government-produced statistics are beginning to be doubted and the huge U.S. debt level is beginning to come home to roost as some countries seemingly (reportedly) are beginning to reduce their reliance on dollar denominated securities in their foreign exchange holdings.  Perhaps the Trump Presidency is not making America great again – at least in terms of dollar dominance of global financial markets –  but having the opposite effect globally.

Could all this herald the start of the much predicted crash.  Stock markets appear to be stalling, bitcoin has come off nearly 50% from its peak – maybe the speculators and wealth protectors are at last beginning to see gold as an answer.  It’s probably too early to tell yet, but signs don’t augur well for the seemingly unending bull markets in equities we have been seeing in the past few years.  Market growth is all about confidence.  Once that starts getting eroded it can turn into a desperate downwards spiral.

The problem of course for gold is that, should markets collapse, it too could suffer collateral damage as institutions and funds struggle for liquidity and have to sell good assets to stay afloat.  We saw this in 2008 in the last big stock market collapse, but the comfort for gold holders, perhaps, is that gold was far faster to recover than equities and went on to perhaps its strongest bull market ever taking the price up to around $1,900-plus over three and a half years, nearly tripling its price from its October 2008 nadir.

As I write the spot gold price has indeed briefly hit the $1,350 level.  Whether the U.S. market will allow it to stay there when it opens in just over 3 hours time remains to be seen.

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Gold picks up ahead of Fed interest rate decision

One of the buzz words going around at the moment re. Janet ‘will-she-won’t- she’ Yellen and the FOMC voting to start raising Fed interest rates is ‘normalization’.  But whatever the Fed does it is no way going to be ‘normalization’ in any realistic sense of the word relative to past ‘normal’  interest rate patterns.  The general consensus at the Mines & Money conference in London this past week was that rate rises would almost certainly begin this month as Yellen and the FOMC have talked themselves into a position where not to do so would destroy any remaining credibility that the Fed may actually have brought things under control – but ‘normalization’ – perhaps not..

Let’s face it, interest rate normalization is not raising rates by 25 basis points but more like instigating the start of a raising program which will see them rise to 2.5% or higher and there looks to be no way the U.S. economy is strong enough to handle this even over a couple of years.  Indeed another one of the prevailing thoughts at the Mines & Money conference from some very savvy analysts and commentators was that even if the Fed does raise rates by as little as 25 basis points now, it will likely have to backtrack and bring them down again within the next six months AND then instigate a QE4 on top of that.  The stock markets are weak and potentially on a hair trigger for a massive collapse.  Q3 earnings figures from major companies were mostly pretty dire and the strong dollar is eating into exports, while making imports ever less costly.  Government CPI and unemployment stats are largely a farce.  The market is being held up by sentiment alone – certainly not by fundamentals.  And sentiment can change overnight, sometimes on a seemingly innocuous piece of news.

The gold price performance today, and that of the general equity markets, ahead of any Fed announcement has been perhaps enlightening.  At the time of writing gold has risen about $30 above its recent lows.  Suddenly what had seemed a foregone conclusion that the Fed would start raising rates this month has perhaps run into doubt.  While we await the decision we still feel the Fed is too far down the line not to raise, although we would see the possibility of a smaller rise being implemented.  In some ways the Fed could be damned if it does raise rates, but perhaps even more damned if it doesn’t. A 10 basis point increase would be an uneasy compromise, but has to be a possibility.  However it would be seen as a sign of weakness.

The fall in the dollar index by nearly 2% though would also definitely have strengthened the gold price which tends to move counter to the dollar.  Whether the sharp dollar fall was a natural progression or part of Fed machinations to try and keep the rising currency, seen as damaging to the economy, under some form of control is less certain.

While some key indicators, notably today’s nonfarm payroll figures, are just what the Fed needs to support the interest raising decision, there are others like the recent Chicago PMI figure coming in at 48.7 (anything below 50 is seen as negative) suggests that all is not well in America’s industrial heartland.  Tuesday’s broader ISM manufacturing index figure was equally pessimistic at 48.6, although the ISM services index was positive at 55.9, despite this being a little down on the previous month.  So all in all it does look like the U.S. economy is far from out of the woods.

As noted above, the US Dollar Index dipped back from a brief foray above the 100 mark, back down to a current 98.3, which may have reduced slightly continuing concerns about U.S exports, although this is hardly conclusive.  Mario Draghi’s decision for the ECB to only reduce bank deposit interest rates by a smaller than expected 10 basis points helped here.  A bigger reduction might well have seen the euro move to nearer parity with the dollar.

Gold’s healthy performance today was despite the positive US nonfarm payroll figures and was perhaps down to the feeling that it has been oversold over the past month or so, resulting in a certain amount of short covering.  Markets often react too far in this manner – but even so, if the Fed does raise interest rates by the expected 25 basis points it could take a further knock, but anything less could see it soar.