Weakening USD is Positive for Gold and Silver
$GLD, $USD, $SLV
The US Dollar (.DXY) Index has been moving lower, retreating 9% in 5 months, from 102 in March to its current 93.39.
Not surprisingly, Gold has risen almost 10% in US Dollar terms during this frame.
Earlier this year many participant expected US Dollar to continue its rally of the past few years based on stronger economic growth on tighter monetary policy by the Fed.
The International Monetary Fund (IMF) recently cut its GDP growth forecast for the United States from 2.3% to 2.1%. It also cut its Y 2018 forecast from 2.5% to 2.1%. Signaling a weakening economy.
The Fed has made good on 2 interest rate hikes so far in Y 2017, but based on weaker-than-forecast inflation and growth numbers, it will likely fall short of the 4 rate hikes it planned late last year.
According to the Fed’s preferred inflation guage, Core PCE price deflator, inflation is running well below 2%.
Economic growth in Q-1 of Y 2017 was 1.2%, with consumer spending increasing only 0.6% Y-Y.
Initial Q-2 GDP numbers out on 28 July at 2.6 could prove pivotal in the FOMC’s rate decisions for the for the rest of the year.
The Atlanta Fed forecast’d 2.4% growth, down from its 1 May estimate of 4.3%.
But despite two rate hikes and impending balance sheet reduction, the 10-year yield has moved 15% lower since early March while USD has been weakening, both contrary to many forecasts at the start of Y 2017.
Typically, the Fed will raise rates when it thinks the economy is firing on all 8 cylinders. But it is becoming more evident that the Fed is now attempting to tighten policy into an economy that is weaker than in previous cycles.
As exhibited by declining Treasury yields and very modest inflation, this is at odds with conventional market forces and investors’ expectations for growth.
At this point, Ms. Yellen may be forced to raise rates later this year.
She needs to at least come close to the 4 rate hikes outlined for Y 2017 in order to have some ammunition to cut if the economy falls into Recession.
Fed fund futures are currently putting the odds of one more rate hike at about 50% in September or more likely in December.
In the meantime, the Fed will continue to jawbone the market, its tactic to influence investor behavior since it embarked on years of massive monetary accommodation to resuscitate the economy after the 2007-08 financial crisis.
Investors are growing leery of the political rhetoric, and putting less weight on the endless string speeches by voting members on the FOMC including: Janet Yellen, Stan Fischer, Bill Dudley, and Lael Brainard in an effort to manipulate markets without doing anything.
While USD has been falling and US Treasury yields declining, the opposite is happening in Europe, where structural reform looks more promising.
A huge rally has been underway in EUR, an indication of the demand for European assets. Also, German Bund yields have risen significantly, and well out of the negative territory seen last Summer.
The ECB is now about to embark on a similar adventure that the Fed is currently undergoing, normalizing monetary policy after years of QE (quantitative easing) and extremely low interest rates.
Time will tell if it has more initial success, but so far it looks promising on both the financial and political fronts.
As global investors continue to reprice expectations for structural reforms in the US and Europe, capital will continue to migrate into growth assets and safe-haven investments as an alternative to markets perceived as riskier.
After trading as low as 1,050 oz in December 2015, Gold has rallied over 200 to its current mark at 1,276.7.
The move higher has been filled some volatility, only to continue making higher highs and lower lows, technically a positive development.
John Templeton said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Now there are many potential catalysts to move this rally in precious metals, Gold and Silver, beyond the skepticism phase, they include: military intervention on North Korea, US government shutdown as the debt ceiling is reached in September, and the beginning of balance sheet reduction later this year by the Fed.
These have the potential to make the 20%+ seen in Gold look small. Gold is a safe haven investment, and the experts advise that investor portfolios contain 10-15% allocation to Gold.
Have a terrific week. – Paul Ebeling
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