It’s been an odd week for gold prices and the US Dollar. Gold fell in value from Monday to Thursday as the US Dollar bounced back from a slump in value (again) but began to rise steadily again today. Fears about inflation and subsequent interest rate rises are making the markets jumpy.
These fears were expected to be settled by the latest minutes from the Federal Reserve’s monthly meeting in January, but the announcement was effectively ‘change is coming… but not today’. Many experts predict that February’s end of month meeting will finally initiate the first of several interest rate rises.
A rise would seek to protect consumers, businesses and investors from inflation, and additionally make the US Dollar a more attractive prospect, but gold and silver could be punished by any dramatic rate rises. For bullion, interest rates tailing inflation is a fair spot to be in, but the threat for bullion is that it offers no yield. In comparison, treasury bonds do. As interest rates rise then the demand for bonds rises too, and investors will switch away from precious metals.
One saving grace for gold and silver is that any potential Dollar gains are limited by fears of a fiscal deficit in the US, courtesy of President Trump’s $4.4 trillion budget plan. The US administration announced the plan on Monday February 12, with a decade of deficits projected in their documents as a result of increased federal spending – up by $300 billion.
Since the start of 2018, the US Dollar has behaved like a drowning man; struggling to fight the rough seas and keep afloat. Investor confidence in the American currency is low, primarily driven by the US government’s confusing contradictory statements about how strong or weak they want the Dollar, but fears about a trade war with China and the threat of this growing budget deficit are further hindering investment potential.
A price chart graph from the BullionByPost website showing the change gold per ounce, priced in US Dollars, over the past week.
Statistically, the US Dollar dropped 3% in value for January 2018, which follows an 11% drop in USD for 2017. There are small, swift rises in value for the greenback but generally the currency has been sub-par. It’s no coincidence that USD dropped in value as inflation figures were announced and President Trump introduced trade tariffs for China and South Korea when importing certain items into the USA, such as solar panels and washing machines, and with fears for metal tariffs to follow shortly.
The fluctuations in US Dollar value are caused by more factors than just people saying the Dollar is good or bad. Investor caution – surprisingly directed towards currencies other than the Dollar – is a big factor. The Dollar might be weak, but when it gets low in value it becomes a cheap investment in a long-standing currency with a major world power. In contrast, the Pound is unstable because of Brexit, the Euro is a risk because of how many different nations use the currency, and the Yen is uncertain because of Japan’s economic slowdown. Investors aren’t especially happy with any currency at present, so it’s a case of cherry picking which is the best at any given moment.
Another factor supporting increased value for the US Dollar is the inflation level. Currently the US is experiencing 2.9% inflation. This figure, combined with the 0.3% growth in wages and the record low 4.1% unemployment rate mean that the US economy is primed for an interest rate rise, which in turn reassures investors that their input into the US Dollar will see solid rewards and reassures the public that their buying power won’t be diminished by inflation.
Action from the Federal Reserve could generate positive results for the value of the Dollar, but the worth of USD isn’t just dictated by the Treasury. The stock market’s bull run has kept the desire for gold at a minimum for past seven weeks, which has in turn protected the US Dollar from being punished by bullion. Had the stock market bull run been less spectacular then we could have seen a crash in the value of one of the world’s leading currencies.
The Dollar now faces an uphill struggle. All signs point to an interest rate rise in the next month or two, which should boost the value of the currency, but given the nature of the US economic projects in the pipeline there’s only so well the Dollar can do. Deficit and debt weigh upon it, as does the issue of a trade war. It’s one thing to tax washing machines, but if the US government goes ahead with plans to place import tariffs on aluminium and steel then countries like China who heavily export to the US will likely retaliate with tariffs or increased fees of their own. The US economy can’t afford to push dramatic changes at home and fight battles abroad if the administration wants a successful Dollar, but then again – maybe they don’t.