How Does the USD Really Affect the Gold Price?
Source: Julian D. W. Phillips, Gold/Silver Forecaster (1/15/10)
What prompts investors large and small to go out and buy gold for their portfolios? Are they moved by a single piece of news seen on television or one piece of U.S. economic news? No the average gold investor. . .
General View of U.S. Influence on the Gold Price
We have to ask ourselves what prompts investors large and small to go out and buy gold for their portfolios. Are they moved by a single piece of news that is seen on television or one piece of U.S. economic news? No, the average gold investor has accumulated reasons over time, which convinces him that it is wise to hold gold. But the real truth is that the gold market is global and affected by a vast number of investors each with his own reasons for buying gold from Mongolia to Manhattan. And at this moment in time, it is the non-U.S. investor that is driving the gold price.
We all tend to believe that the most visible news will be the most influential on the gold price, particularly when reporters and commentators shout it out. Recently how many times have you seen talk of the Fed pulling back on Quantitative Easing and raising interest rates as a reason for selling gold? The current picture of the Fed's Balance Sheet is a broad gauge of its lending to the financial system. Its liabilities rose to $2.274 trillion this from $2.216 last week. This shows that Quantitative Easing is rising still. This was primarily due to a jump in Agency mortgage-backed securities, which rose to $968.59 billion from $908.74 last week. So, interest rates are unlikely to rise for some time. As far as gold goes, interest rates affect the exchange rate, which affects gold, but if it leads to a 'real' U.S. recovery, it has a bad affect on the gold price.
Is a real recovery in the U.S. on the way now? We revert to a statement we made after the credit-crunch first hit in 2007, where we said firmly, that the Fed would not do anything until consumer confidence was visible and the housing market was recovering visibly too. We maintain this position. This is not the case yet. With such an altered consumer landscape now, where savings are on the screen, debt-repayment a priority, making sure that one is not bitten twice, where businesses nurse cash-flow so as to be able to retain a good 'acid' [liquidity] ratio, the time for such moves by the Fed is still a way off. They are as aware of the dangers to 'confidence' as we all are of 'tightening' too early. They have to wait for a good recovery, one where employment of non-service staff is growing visibly. That day is still far off. Will that be bad for the gold price?
One of the earliest warning signals that the recovery is strong will come from the consumer. He will spend more on needs first. Wisely, he goes to the cheaper end of the market, usually meaning imports from China. At the moment imports from China are dropping slightly, but should rise if the recovery gains solid traction. Imports from the East are the first beneficiaries of a U.S. recovery.
Now look at oil imports. The oil price is strong but nowhere near as strong as at its peak. At this level, prices are sustainable, indicating consumer acceptance and a slight advance into wants spending. The rise in the Trade deficit in November was assisted by higher oil prices. Since then oil prices have stabilized not fallen, so the Trade deficit oil component should stabilize until oil takes off again.
It is tragic that overall, the U.S. Trade deficit is perhaps the best signal of the arrival of a 'real' recovery in the States. As the U.S. economy regains its health, its Trade Deficit keeps rising. As it rises, the flood of Dollars adds velocity to a falling $. This leads to an increase in $ surpluses held by foreigners, already glutted with them, now looking for ways to spend or diversify from them. Result; U.S. economic health equals a falling $ and worried creditors of the USA falling $ in the eyes of the U.S. investor means a rising gold price.
In November, the U.S. trade deficit widened by 9.7% to $36.4 billion, which is partly accounted for by higher oil prices. Exports rose for the seventh straight month, but imports rose at a faster pace in November. The government also revised the deficit in October to $33.2 billion from $32.9 billion. As a result the deficit for the year now totals $340.6 billion, down from $654.1 billion in the same period last year and $720 billion the year before. Overall, there is little evidence in these numbers that points to any vigor in the 'recovery'. So it is right that the Fed continues to hold back. Consequently we have at least part of the reason why the $ has held/rallied of late and the gold price consolidating.
Where Will This Take the Gold Price?
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