Careful investors must have found that the US dollar and gold, which are negatively correlated in our common sense judgment, have strengthened in the near future. The US dollar index has remained above 98 for several weeks, while gold has remained stable near US$1500. What is the logic behind this? What inspiration will it have for gold prices in the future?
First, we need to know how strong the dollar is now. I suggest investors pay attention to such an index, the Broad Index of the Foreign Exchange Value of the Dollar, which is different from our traditional USDX perception, and is used to measure the value of the dollar relative to the currencies of the countries in which it trades. In this index, the weight of the euro is 18.61%, that of the RMB is 16.17%, and that of the Mexican peso and the Canadian dollar is 13%. (The above weights are updated annually from the Federal Reserve’s official website.
From the above chart, we can see that the index has recently reached a new high in the past 20 years. How to understand this phenomenon? Our intuition tells us that American merchandise trade is more competitive than other countries, and its nominal value is higher, which is good for the United States. But if we think about it carefully, it is not good for exports and subsequent economic growth. In this sense, we can find some clues about the Trump government’s initiation of a trade war, which also indicates that the so-called “currency war” of “forcing the dollar to weaken” will last longer than we expected.
So has this common strengthening of the dollar and gold ever happened in history? Yes, but very rarely. It has happened since the 21st century. That’s from the fourth quarter of 2009 to the second quarter of 2010. At that time, the global economy had just emerged from the subprime crisis, especially in the United States, because the Obama administration’s double stimulus policy (monetary and fiscal), GDP and economic data slowly came out of the quagmire, the market turned to be optimistic about the economic prospects of the United States, and the Federal Reserve continued to introduce quantitative easing policy. That’s why the dollar and gold have strengthened together.
How to explain that the dollar and gold are strengthening together now?
The reasons for gold’s rise are quite adequate. The real yield of US Treasury bonds has been declining, the long-term and short-term yield has been hanging upside down, the market expects the Fed to continue to cut interest rates this year, and the economic and trade frictions have not subsided. All these are solid reasons for supporting gold’s strength.
Dollar strength seems unreasonable, but the reason is simple. Looking at the trade-weighted Dollar Index, we can see that it is not how strong the United States is, but how weak other countries are, and the currencies of several countries that trade with the United States are depreciating. You may say that there are active factors in it, but this more or less reflects the economies. Physical condition, therefore, the strength of the dollar is purely an accident, is “50 steps laugh 100 steps”. After a circle of market funds, it was found that they could only return to the United States, manufacturing industry was afraid to go, and the stock market was also high. What should we do? You can only buy bonds and gold. Because only these varieties can ensure safety and mobility.
At present, the US dollar and gold have both strengthened. Compared with the time in 2009, the logic of gold has basically remained unchanged. The logic of the US dollar has changed from active to passive, and can be supported by data. In a word, the weakening of the US dollar may be the reason for the strengthening of gold, but the strengthening of gold is not necessarily the result of the weakening of the US dollar.
The author boldly predicts that this situation of double strength of gold and US dollar will remain for some time, at least until the second quarter of 2020, for the following reasons:
- By the end of this year, U.S. monetary policy will remain loose.
- There is room for further downward trend in US Treasury yields. Negative interest rates are not excluded.
- Negotiations between the United States and its trading counterparts will continue, and the main defense against them is currency depreciation.
- Before the general election in 2020, the U.S. government did not want the U.S. stock market to collapse.
Among them, the first and second reasons are to support the strengthening of gold, and the third and fourth reasons are to support the strengthening of the U.S. dollar.