LAWRIE WILLIAMS: Gold ends week on the up as dollar slips
Friday saw the gold price pick up significantly to end at over $1,180 after spending much of the period in the low $1,170s, but the rise was almost all due to a turnaround in the U.S. dollar index which slipped back a little, but is still just under 9% higher than its low point in mid-February. Gold’s overall pattern has been to follow the dollar index, but inversely, as the gold price – as priced in U.S. dollars - is itself considered a measure of the strength, or weakness of the U.S. currency. If the dollar slips then gold tends to rise and vice versa. Not coincidentally the gold price is down this year by around the same amount the dollar has risen. However in relation for example to copper, gold has got off fairly mildly. Copper is down nearly 20% since the start of the year.
The weak dollar over the first three and a half months of the year saw the gold price rise quite dramatically and it reached over $1,350 in mid April making many pundits forecasts, including my own, of a likely year end price of over $1,400 look very conservative.
But from mid April, with the rhetoric around the Trump trade tariff impositions taking centre stage, it all turned around. The dollar started to strengthen and the gold price, along with most other metal and mineral commodities priced in U.S. dollars, began to slip accordingly. As the tariff impositions moved from conjecture (many thought President Trump might be bluffing) to reality and counter measures were threatened and put in place by affected nations, the dollar started to rise and has not really looked back apart from the odd stutter since.
Of course the unintended consequences of the Trump tariff impositions have been that the rise in the dollar against the currencies of the affected countries has tended to counteract much of the tariff increases and this has notably been the case with the major target of the tariffs – China. The yuan has fallen by around 10% in value against the dollar since mid-April as the country’s economy has turned down. But the Chinese yuan has not been the only affected currency. The euro is down around 8%, the Canadian dollar over 6% and the Mexican peso about the same, although the latter represents a recovery from around a 16% fall by mid-June. Indeed there has been a knock-on effect with many other key currencies also seeing falls against the greenback.
So all the Trump-instigated trade war has done so far is make the U.S. dollar less competitive against the currencies of its key trading partners and exported goods competitors while the currency downturns will mitigate the pricing effects of the tariffs on imported goods. That looks like a lose:lose situation, although on the positive side from the U.S. point of view the policies may already be stimulating new trade talks between the U.S. and affected nations which have seen their economies turn down as a result of the tariff impositions – notably China.
Martin Murenbeeld in his latest weekly Gold Monitor issue addresses this situation in some depth and obviously feels that the U.S. dollar is becoming increasingly overvalued in global terms and the obvious solution is to find a way of devaluing the dollar, without its trading partners devaluing their own in retaliation. No easy task and not necessarily one the U.S. Administration and the Fed would be prepared to take.
But even after Friday’s improved gold price, the yellow metal is around $170 down on its peak earlier in the year. That’s over 9% down on the year to date and over 12% down from its peak. Gold stocks, as represented by the HUI Index, have fared even worse being down around 28% year to date. One suspects gold bullion has been oversold and gold stocks even more so. But don’t expect the gold price to do much for the next couple of weeks. After the Labor Day holiday in the U.S. in the first week in September things could start to change though as perhaps some of the trade war rhetoric will cool, China will come back to the negotiating table and the dollar index may ease giving gold some welcome respite.