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LAWRIE WILLIAMS:Gold plunges on stronger dollar or...

Profit taking, dollar strength, price manipulation or whatever – take your choice – but the gold price didn’t stay back above the $1,300 level for long without falling back sharply.  For the moment we’ll attribute the fall to dollar strength as the gold price tends to be inversely related to the dollar, although those who see price manipulation consider strength in the dollar to be just another side of the same coin.

As I write, the dollar seems to be strengthening further with the DXY dollar index back at over 95 after a nadir of around 87.  The market, though, seems to have lost track of the fact that the DXY was considerably higher - at comfortably over 100 – when President Trump took office nearly a year and a half ago, but it should also be borne in mind that the gold price was only around $1,220 at that time.  Continuing dollar strength could thus lead to a further gold price decline – indeed we are seeing some signs of this today.

But let us consider the reasoning behind the latest strength in the dollar and gold price weakness.  It appears to have come about as a result of what appears as if it might be an escalating trade war between the U.S. and China the world's gtwo biggest economies.  President Trump is imposing tariffs on around $50 billion worth of Chinese imports.  China says it will match these tariffs with taxes of its own on American goods imported.  President Trump has stated that if China imposes counter-tariffs then the U.S. will up the ante further and China has responded that again it will retaliate at a similar level.

With the U.S. also imposing tariffs on Canadian, Mexican and European steel and aluminium imports the result has to be that U.S. domestic prices will rise as many of the tariff-imposed goods cannot be sourced domestically so are going to cost manufacturers which rely on these substantially more.  This will raise the U.S. inflation rate and could put a dent in what is already a shaky economic growth pattern.

In a full blown Sino/U.S. trade war the U'S. may seem to have the advantage in that it exports less to China than it imports.  However Chinese companies tend to be far quicker on their feet than their Western counterparts so may be able to recover far quicker from any economic setbacks that may occur.  Indeed some may see a trade war as a stimulus to the Chinese economy rather than a long term negative.

So why is the dollar showing signs of strength despite an apparently escalating trade war which is unlikely to do anyone any good.  At the moment the dollar strength is two-fold.  Key currencies like the Euro, the British pound, the Canadian and Australian dollars and the Chinese yuan are being driven downwards (hence the dollar appears to be rising), but also money will be flowing into the dollar as perhaps more of a safe haven in times of an ensuing global financial crisis than gold and other precious metals.  We think that this will only be in the short term.  Equity markets across the globe are already plunging on escalating trade war fears. 

Many financial pundits have long been predicting a huge financial crash and the Trump initiated tariffs could be the trigger here – see our earlier article on the subject: Trump opens Pandora’s box. Global trade war very positive for gold.  While the trade war rhetoric may not initially have been beneficial for gold we do see it becoming so if the situation worsens – and as President Trump is not renowned for backtracking on his pronouncements things may indeed deteriorate further.  Hold on to your hats!

We quoted Dr. Martin Murenbeeld in the article referenced above as saying: “a global trade war would be catastrophic for the world economy – and would be a big issue for the gold market! A global trade war would seriously alter central bank policies – more loosening/less tightening – which is a plus for gold! And the dollar’s reserve-currency role would be damaged, and accelerate the move to a multiple reserve-currency world (with the dollar playing a much-reduced role.   We rate Dr. Murenbeeld as being among the most realistic of gold analysts.  If he is correct in his analysis then the global economy is in for a period of increasing instability.  Equity markets will crash and gold and silver perhaps will come into their own as being among the safest places for your money!

19 Jun 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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