LAWRIE WILLIAMS: Gold facing severe headwinds despite overvalued dollar – Murenbeeld
The latest issue of economist Dr. Martin Murenbeeld’s Gold Monitor newsletter (www.murenbeeld.com) does not come up with a particularly optimistic view on the short term future for the gold price. In fact it suggests the contrary may prove to be the case.
For those who do not know him, Dr. Murenbeeld is a hugely respected Canadian financial analyst who now runs his own advisory service after working for Dundee Economics as the group’s chief economist for many years. He concentrates, among other things, on gold and is known, and respected, for his impartial views and forecasts for gold and other precious metals. His annual gold price forecasts have tended to be among the most accurate out there, so his views are always balanced and well worth taking into account when assessing the likely path of the gold price. He is neither really a gold bull nor a gold bear, but tells it how he sees it at any specific point in time, although on balance is probably long term gold positive.
In his latest Gold Monitor newsletter Dr. Murenbeeld comments that rising equity markets, a rising dollar on the back of a likely tax deal out of Congress before yearend, the certainty of more Fed rate hikes – the next one on December 13 - and other attractive speculative alternatives including art, real estate, bitcoin, etc are all putting a dent in the short term investment prospects for the yellow metal as investors look for better returns elsewhere. He does however point to some uncertainties out there which could turn the scenario around – notably Mueller’s investigation, a geopolitical crisis (North Korea?), and/or Trump Administration internal problems (will Tillerson go in the end?), to which we would add a further possible Middle East conflagration, an escalation in the Trump/Iran rhetoric (which some suggest could lead to military action), the much predicted crash in equities markets and a possible bursting of the bitcoin bubble, although neither of the financial turnarounds currently seem to be on the short term horizon.
Dr Murenbeeld has for some time, though, reckoned that the U.S. dollar is overvalued and sees President Trump’s proposed tax cuts as exacerbating the country’s severe debt problems and budget deficit which, ultimately could lead to the dollar diminishing in value against gold and other currencies. But this is unlikely to happen in the short term. Dr. Murenbeeld notes: ‘Given the low domestic savings rate, funding for the rise in the US budget deficit will also have to come from abroad, meaning US interest rates will likely need to rise. Assuming the extra capital inflows push the US dollar higher, and the expansive fiscal policy raises US growth rates, the US trade deficit will rise. (For those readers familiar with GDP accounting identities, a rise in capital inflows must go hand in hand with a rise in the current account deficit!)’, so although he sees the dollar as overvalued it may well rise in the short to medium term, which would not be positive for gold.
Dr. Murenbeeld continues: ‘Our ongoing question is how the Trump Administration will manage all this – a bigger budget deficit and higher GDP growth rates – without a rise in the US trade/current account deficit. It can be done, but the US will need a higher savings rate, more exports, and a much lower dollar. Indeed, the US will need to fund the budget deficit from domestic sources, i.e. from savings generated on the back of less imports and more exports! Or the Trump Administration will go further down the road of protectionism – which is not the best alternative when the dollar should instead be devalued!’.
He sees this as all adding up to an awkward near-term outlook for gold. However President Trump has himself indicated a preference for a reduction in the dollar index (although has been a little ambivalent about this) and indeed the dollar index has fallen by around by around 9% since he took office. But, Murenbeeld notes, failing a further engineered decline in the dollar parity against other currencies and gold, the reverse may come about and the dollar rise, putting even more pressure on the gold price.
09 Dec 2017