January 24, 2018

How the US Dollar Helps Gold

BYTradition Gold

Gold has been on a torrid rally.  In fact, gold prices have risen to its best price since August 2016, as investors are happily joining the move.  There are several reasons for the current rally, but what has been in the news lately, and is very important indeed, is that the US dollar has been under pressure.

As the US dollar falls, gold rallies.  When the US dollar declines in value, it is robbing holders of dollars of their purchasing power.  So what will investors do?  Investors of all stripes buy gold as a store of value to hold its purchasing power.  In short, when the US dollar declines, gold investments do quite well as we can see in the chart below.


U.S. Dollar

Was there a specific cause for Wednesday’s $20-ounce explosion in gold?  The US dollar had been weak for some time and was ignored by the markets in general; however, once the Nasdaq traded above 7,000.00 for the first time in history, it just couldn’t be ignored any longer. Profit takers came in and sold the new equity highs and bought gold.

CNBC reported the following about the US dollar:  Mnuchin made the comment in Davos, Switzerland Wednesday morning to news reporters attending the World Economic Forum. The dollar index, reflecting the dollar’s value against a basket of currencies, tumbled 1 percent to about 89.25.

Mnuchin’s comments echo statements by President Donald Trump, who famously helped turn a market trend of a stronger dollar last January when he said, prior to his inauguration, that the dollar was “too strong” and that U.S. companies can’t compete because of it, particularly against the Chinese. The dollar index has lost more than 10 percent since then, and after Mnuchin’s comment Wednesday morning, it sank to the lowest level since December 2014.

Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters, according to Bloomberg, adding that the currency’s short-term value is “not a concern of ours at all.” Mnuchin speaks on a panel in Davos Wednesday morning, at 11 a.m. CET.


Commerce Secretary, Wilbur Ross, did not share the Treasury Secretary’s sentiment.  He took it upon himself to mute some of the different market movements caused by the weak dollar comments.  “I was there with Steve when he said what he said. And I don’t think that’s exactly what he said.”

Steve Mnuchin will speak at a forum in Davos early Thursday, so we’ll see if he clarifies the comments above.  If the Treasury Secretary does not walk back his comments, it could lead to greater volatility in all of the markets.  The volatility in the gold market would be to the upside.  As you can see in the chart above, the rally is also being bought up on high volume.  This is very supportive of gold prices because as the price is getting more expensive, it is not chasing investors away; they keep buying despite the higher prices.

Changes in a country’s currency policy are major shifts by new administrations.  If these are early hints to a weak dollar policy, this could be the beginning of a major rally in gold.  I you have been thinking of buying gold coins or adding gold to your IRA, now is the time.