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LAWRIE WILLIAMS: Gold strengthens as equities give up 2018 gains or fall

A stronger dollar is keeping the gold price under control in the $1,230s, but for how long?  U.S equities have continued to decline with the Dow just moving into negative territory for the year, while the S&P 500 and NASDAQ have both given up virtually all of any 2018 gains and remain only fractionally above where they were at the beginning of the year.  That brings gold’s performance year to date – down 6% - into perspective, particularly as gold appears to be in an uptrend, while equities are still coming down – at least for the time being.

With major European and Asian markets all down between 8% and 20% year to date, the equities markets falls seem to be across the global board which makes the gold price in most other currencies look even better, particularly  given most exchange rates against the dollar have fallen over the year.  The dollar index (DXY) calculated against a basket of other key currencies, is up nearly 5% year to date.

Should U.S. equities markets continue their downwards path – Asian markets continued to move sharply downwards overnight and European ones are opening mixed today (FTSE 100 down but DAX and STOXX 50 slightly up) – then there has to be a chance that the U.S. Fed (under pressure also from President Trump) could delay, or cease, future interest rate rises which would give gold a major boost should this happen.

At the moment the jury is out on the above scenario, but if the Wall Street decline should be seen to start turning into the oft-predicted crash, then a change in Fed policy has to be on the cards.  We have suggested here in the recent past that the gold price is likely to see some recovery by the year end – perhaps not to the $1,400 plus level which many analysts were predicting at the beginning of 2018, but to north of $1,300 again – but if equities continue to fall and the Fed reverses course, even the more optimistic of the early year predictions could come into play.

Key to future gold price recovery probably remains the strength of the dollar.  Once the impact of the President Trump-initiated tariff wars, particularly those affecting Chinese imports, starts to impact U.S. domestic prices and margins, which they undoubtedly will, this could tip the U.S. economy into recession.  Should this happen equities markets would likely start to spiral downwards, the dollar’s strength would weaken again and this could all force the Fed’s hand.  It wouldn’t want to see the blame for any downturn movement in equity prices being attributed to its interest rate policy.  But that could be a reaction too late.  Past history seems to be littered with U.S. recessions following Fed tightening patterns.  Could we see this happening again?  If so the gold price, in U.S. dollars at least, could be a major beneficiary.

25 Oct 2018 | Categories: Gold

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