LAWRIE WILLIAMS: Gold steady despite overvalued dollar. Bitcoin plunges further
Some might look at where the gold price ended last week with a sense of disappointment given a continuing fall in equities and a further crash in bitcoin. But as Martin Murenbeeld points out in his latest Gold Monitor newsletter, for gold it is largely a case of ‘steady as she goes’. The U.S. dollar has continued to show some signs of strength despite the nation’s big deficit and while this continues we are unlikely to see much positive movement in the gold price. Indeed given the dollar’s strength gold could be seen as having held up pretty well. It actually ended the week a little over a dollar up on the previous week - certainly not enough to make the gold bugs happy, but rather better than it had been doing of late.
But the real dog of the week was bitcoin (BTC) which collapsed below $4,000 at one time on Sunday after trading between 6,000 and 7,000 for most of September up until around a week ago. Ethereum, which many investors had seen as perhaps the best cheaper way into the cryptocurrency dream, fell down below $110 after trading well over 10x that level back as recently as January this year. The bitcoin bubble continues to burst and we wouldn’t be too surprised to see further falls before the end of the year.
General equities are looking nervous at the moment with the Dow almost down to where it was at the beginning of 2018. It fell again when markets re-opened on Friday. We wouldn’t be surprised to see something of a bounce next week, but could this be of the dead cat variety? Many pundits have long been predicting an equity market crash more severe than that of 2007/2008, although there are plenty out there still preaching the latest numbers represent a great buying opportunity. We think the Dow and the S&P are overvalued and will crash at some time, but it is too early yet to tell if this time is nigh. We do suggest that as a cautionary move those currently sitting on profits might consider taking at least some of them now as a cautionary measure as when the real market crash does come it could be rapid and severe.
The weakness in the markets could be giving the Fed second thoughts over the December rate rise which had seemed a stone cold certainty a little over a week ago, but the odds on this are coming down by the day. Should equities continue to fall in the two weeks ahead of the next FOMC meeting, then the Fed may hold off on another rise lest it be seen as strangling U.S. economic growth with its tightening programme. If this happens it could be hugely positive for the gold price - but the odds at the moment on a December rate rise are still 70% plus!
Back to Martin Murenbeeld’s Gold Monitor newsletter. He sees the U.S. dollar as grossly overvalued against many competing currencies and the Trump imposed trade wars are exacerbating the problem despite the President himself suggesting the dollar needs to come down. But unless the U.S. Fed and Administration can somehow engineer a dollar fall, which looks unlikely without some probably unacceptable policy shifts, then the greenback will continue strong, which is probably negative for the gold price, although there have been times when gold and the dollar both rise simultaneously - but such occasions are rare.
So, there are a number of factors at play for the dollar, equity markets and the gold price in the countdown to the year end. We would thus reiterate the advice of Michael Lewitt repeated incessantly in his excellent Credit Strategist newsletter - “keep accumulating it [gold] and save yourselves and your family from the central bankers destroying the world.” Gold is still perhaps the ultimate safe haven investment. It may not increase your wealth but will help preserve it.