Why the US Dollar Matters for Gold

bull market lives on

The US dollar index — six major currencies pegged to the greenback — is trading near its lowest level in 13 months. It’s hovering around 94.04 US cents this morning.

The weaker greenback has surprised me. But there’s now a positive feeling outside the US, which has seen capital flee the dollar.

The European Central Bank (ECB) is nearing the end of its money-printing program. During last week’s meeting, ECB President Mario Draghi said he would discuss potential changes to the program before year’s end. This drove the euro to two-year highs against the dollar.

Meanwhile, the British pound is trading at 10-month highs against the greenback. Inflation has skyrocketed across the country. That’s put pressure on the Bank of England to lift interest rates. If that happens in the months ahead, the US dollar index might lose a lot more ground.

The Bank of Japan, on the other hand, remains dovish. But that’s seen as good news for the Japanese yen, which is trading at five-week highs. Last week, the BOJ pushed back its inflation timing target into 2020–21. The central bank probably won’t end its money-printing program soon. In other words, punters gets to borrow yen at near-zero interest rates for longer.

The Aussie dollar has also performed well against the greenback. It’s trading at its highest level since June 2016.

The weaker greenback has even helped gold climb higher. The yellow metal has surged to US$1,254 per ounce. Remember, a weaker US dollar generally boosts gold prices. Which begs the question: If the dollar keeps falling, will gold break out into a bull market?

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A government in chaos

If you consider the ongoing ordeals of US President Donald Trump, it’s easy to think the answer is ‘yes’. It’s rare to find a positive article about him in the mainstream media.

Trump’s bid to repeal and replace Obamacare hasn’t gone well. That’s why the president is only now trying to pass a repeal plan; the replacement can come later. I wouldn’t get your hopes up, though. Last week, Republican lawmakers pulled the plug on the latest healthcare bill.

The US dollar fell as the news broke.

Remember, the greenback hit a 14-year high when Trump won the US election last November. The majority were hopeful that change was around the corner. But Trump hasn’t been able to achieve anything. The president is considered an outsider by most politicians, even those inside his own party.

Hopes of any reform have evaporated. The US dollar has given up its post-election gains. And I believe it’s heading lower in the short term. There probably won’t be any reforms soon. Trump chose to address the healthcare overhaul before taking on tax reform. And the failure to overcome that problem indicates a government in crisis. Most US politicians are more interested in creating political turmoil than governing the country.

On Thursday, Bloomberg reported Congress is investigating Trump’s business. It’s alleged that Russia’s influence on the US election benefited his company. While I’m confident the committee won’t find anything, it doesn’t really matter. The crisis will be dragged out for months.

The Deep State is trying hard to impeach Trump.

Trump’s eldest son, Donald Trump Jr, his son-in-law and White House adviser, Jared Kushner, and Paul Manafort, a former campaign chairman, are scheduled to appear before Senate committees investigating Russian meddling this week.

The president’s team faces one crisis after another.

That’s not about to change anytime soon, which is why there’s very little chance of major reforms this year. In other words, don’t be surprised if punters keep selling US dollars and buying gold.

Gold pushing higher

Here is gold’s monthly chart dating back to 2011:


Source: tradingview.com; Resource Speculator
[Click to enlarge]

Gold remains in a six-year bear market. You can see that by looking at the major downtrend channel, shown in black. That said, the yellow metal is trading along technical resistance, shown by the upper black line. That’s a positive. But we need to see it close above the upper black line on a monthly basis to get excited. And while we want that to happen, there’s no guarantee that will play out soon.

The US dollar index could pull back to 90 cents, based on Trump’s ongoing crises. There’s a fair bit of support around that level. But don’t expect it to go much lower. Political tensions, along with other global conflict issues, are still brewing. When they inevitably blow up, that’s likely to drive the US dollar index to $1.60. That’s unlikely to be good news for gold.

In that case, while I can only hope I’m wrong, don’t expect gold to break out just yet. It will certainly happen eventually. That’s why it’s worth focusing on the junior gold sector. There are plenty of quality ‘penny gold’ stocks trading at dirt-cheap prices. When gold does break out, we’re likely to see a tremendous multi-year bull market. Remember, the best junior gold stocks could potentially make you 10–100 times your money during the good days.

Regards,

Jason Stevenson,
Editor, Markets & Money

Jason Stevenson

Jason Stevenson

Analyst at Markets & Money

Jason Stevenson is Markets and Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options.

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