Dollar drops, gold soars as U.S. starts to lose control

(January 24, 2018 - by Lawrie Williams)

If gold trading this morning in Europe is anything to go by, gold is headed for US$1,350 an ounce, and not before time.  But before non-U.S. gold-owning citizens get carried away with euphoria they should also be aware that the dollar index has dropped below 90 for the first time since early 2014 and the gold price in many other key currencies like the British pound (easily at its highest level against the dollar since the Brexit vote) the Swiss Franc and the Japanese yen, has actually fallen.  Silver though has been somewhat left behind with the Gold: Silver Ratio at well over 78, but we do anticipate, if gold stays in the high $1,340s, or breaks through $1,350, that silver will play catch-up.  It usually outperforms gold when the latter is rising sharply.

The performance of the dollar gold price level, though, does suggest that the big money into the gold futures markets, which had been successful in keeping the shiny yellow metal price down below $1,340, may be losing control.  It could thus see discretion as the better part of valour and allow gold to find a new top and then work hard again to keep it there.

The key though looks to be U.S. dollar strength and it remains to be seen whether the recent decline is an engineered one in an attempt to make U.S.-manufactured goods more competitive (a policy that had had been signaled by President Trump some time back - although since denied).  If so a dollar decline may have gained more steam than intended, as these things do.  On the face of things, the U.S. economy is in a decent growth stage, unemployment is at a low level – both things that might normally lead to dollar strength, not weakness.  But perhaps massaged government-produced statistics are beginning to be doubted and the huge U.S. debt level is beginning to come home to roost as some countries seemingly (reportedly) are beginning to reduce their reliance on dollar denominated securities in their foreign exchange holdings.  Perhaps the Trump Presidency is not making America great again – at least in terms of dollar dominance of global financial markets -  but having the opposite effect globally.

Could all this herald the start of the much-predicted crash.  Stock markets appear to be stalling, bitcoin has come off nearly 50% from its peak – maybe the speculators and wealth protectors are at last beginning to see gold as an answer.  It’s probably too early to tell yet, but signs don’t augur well for the seemingly unending bull markets in equities we have been seeing in the past few years.  Market growth is all about confidence.  Once that starts getting eroded it can turn into a desperate downwards spiral.

The problem of course for gold is that, should markets collapse, it too could suffer collateral damage as institutions and funds struggle for liquidity and have to sell good assets to stay afloat.  We saw this in 2008 in the last big stock market collapse, but the comfort for gold holders, perhaps, is that gold was far faster to recover than equities and went on to perhaps its strongest bull market ever taking the price up to around $1,900-plus over three and a half years, nearly tripling its price from its October 2008 nadir.

As I write the spot gold price has indeed briefly hit the $1,350 level.  Whether the U.S. market will allow it to stay there when it opens in just over 3 hours’ time remains to be seen.