Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is Dollar’s Weakness Giving Way to Gold?

Commodities / Gold and Silver 2021 Mar 16, 2021 - 09:03 AM GMT

By: Arkadiusz_Sieron

Commodities Since its peak in the spring of 2020, the U.S. dollar index has lost almost 12 percent, and it could decline even further, thus supporting gold prices.

There is a weakness in the U.S. dollar. Let’s start off by taking a look at the chart below. As you can see, the broad trade-weighted dollar index has been declining recently. Since its peak in late March 2020, the greenback has lost almost 12 percent.





Not surprisingly, some analysts argue that the American currency has entered a multi-year bear market , with more declines on the horizon. Are they right? And what would that imply for gold?

Well, there are strong arguments for the bearish performance of the greenback . The confidence in the U.S. dollar is waning . To be clear, I don’t predict the collapse in the greenback anytime soon. I’ve been hearing the rumors about the dollar’s death for years – and they are often exaggerated. The truth is that the greenback remains the least ugly sister of the fiat currencies . And it’s dominance is overwhelming: the U.S. dollar’s share of currency reserves reported to the IMF was 60.4 percent in Q3 of 2020, while the share of the euro , the second most important reserve currency, was only 20.5 percent.

However, the share of the U.S. dollar has declined from 64.7 percent in the first quarter of 2017. It seems that Trump’s trade sanctions and ambiguous stance towards U.S. allies have pushed them to reduce their exposure to the American currency. No one wins trade and currency wars . In addition, in October 2020, the greenback ceased to be the world’s most used global payments currency , falling behind the euro for the first time since August 2013 .

And the recent update to Tesla’s investment policy, which enables Musk’s firm to hold part of its cash holdings in cryptocurrencies and gold, is a clear sign the big companies are losing some confidence they previously had in the U.S. dollar. Indeed, sentiment is clearly bearish , as bets against the dollar have recently risen to nearly their highest level in a decade.

The negative sentiment may of course, be excessive, especially given the fact that the American economy would probably, as always, recover quicker than its European and Japanese peers. However, there are important headwinds against the buck . First of all, the Fed aggressively slashed interest rates and expanded its balance sheet , thus having its monetary policy resemble the ridiculously dovish stance of the ECB and the Bank of Japan . The U.S. central bank also become more tolerant toward higher inflation , so it’s going to leave the federal funds rate at or near zero for years.

Second, the Fed’s recent dovishness is accompanied with the expansion of the fiscal deficits . The explosion in the U.S. debt and in the broad money supply has significantly increased the supply of dollars, making their value decline. The lavish fiscal policy not only ballooned the public debt , but it also contributed to the large twin deficits , i.e., the simultaneous fiscal deficits and the nation’s current account deficits. As a reminder, the twin deficit that President Bush triggered in the 2000s reduced investors’ confidence in the American economy and its currency. Hence, it contributed to the bull market in gold .

And the same may occur this time. After all, a twin deficit means that more dollars are being printed and moved abroad. In contrast, the EU runs a huge current account surplus, so there is an inflow to the euro through foreign trade.

Third, with an economic recovery from the pandemic , the risk appetite has been increasing. Such a “risk on” environment has been historically negative for the greenback, as capital flows into more risky emerging markets.

So, the black clouds over the dollar should be fundamentally positive for gold prices, as the yellow metal is often negatively correlated with the greenback. This is an important difference between 2011 and 2020. As the chart below shows, the American currency bottomed out in the summer of 2011, starting its multi-year bull market.



If this scenario replays, it would be, of course, bad for gold. But the above presented arguments show that the bull market in the U.S. dollar being similar to that of 2011-2020 is unlikely. And the euro doesn’t suffer from a similar crisis as it did in 2010-2012.

The bearish case for a dollar is also supported by the The Economist’s Big Mac Index , as only three currencies are now overvalued against the U.S. dollar, which suggests that there is more room for declines in the greenback’s value. Indeed, in 2009-2011, the American currency weakened more than 19 percent, while now it hasn’t weakened by even 12 percent! The continuation of the bear market in the U.S. dollar should be supportive for the yellow metal , especially if the weaker greenback will be accompanied by a slide in real interest rates .

If you enjoyed the above analysis, we invite you to check out our other services. We provide detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in