Dollar Weakness Supported Gold
Precious metals headed higher this week with gold hovering around $1,200. Dollar weakness supported gold prices, but gold stayed fairly quiet. Silver hovered around $14.50.
Trade talk once again was a mover for both gold and the dollar. President Trump announced the possibility of new tariffs for China in the ever-escalating trade war between the U.S. and China. Since the start of the talk of tariffs and trade war, the dollar index has been going up, which has been gold’s biggest headwind. However, weakness in the Chinese yuan is going to be exerting stronger influence on gold prices as well.
The dollar had dipped mid-week on news of a potential trade resolution between the U.S. and Mexico outside the scope of NAFTA. Investors moved out of some safe haven dollar positions seeing it as an indication that trade conflict with China and the EU might be resolved soon as well.
September Reversal for Gold?
Gold looks to be headed for a reversal. For the month of August, gold is down. However, this is fairly typical for metals to decline in the summer before reversing going into September. September is the most lucrative month historically for gold with average gains of 2%.
What this means for investors: The dollar is still the biggest obstacle for gold right now. Volatility in an overvalued stock market is likely to be a factor going into the fall though. Many investors are becoming wary of overvalued tech stocks in particular. As always when considering gold buying for a long term safe haven buy, think about price dips as buying opportunities.
The Fed’s Next Move
The Federal Reserve just had its annual Jackson Hole, Wyoming summit. At it, they outlined potential future direction for monetary policy. Fed Chairman Jerome Powell made the case for a further, gradual increase in interest rates. President Trump recently expressed frustration at the rising rates, and Powell further indicated that the Fed would not cave to political pressure. Powell also downplayed the risk of overheating the economy with rate increases, which has been a source of concern for some. He also noted changing economic structures that are making monetary policy more difficult to navigate.
What this means for investors: Investors have been anticipating a September quarter point rate increase already. Despite remaining on track with rate rises for now, Powell seems to be moving cautiously for now as economic factors and inflation projections are seeming more uncertain. After the last few rate rises, gold has had a boost.
Currency Crisis in Emerging Economies
Argentina’s economy is rapidly deteriorating. The Argentine peso is down 52% this year against the dollar. This week alone it slid 20% over two days. Argentina now has the highest benchmark rate in the world with rates at 60%. The Central Bank’s five interest rate hikes this year have been ditch efforts to soothe the economic turmoil. A resurgent dollar, spike in energy prices, and a decline in agricultural exports all contributed to the situation. Argentina was forced to ask the IMF for a loan, but investors are worried that the government will default on its debt.
What this means for investors: Argentina, along with countries like Turkey, Brazil, and South Africa, are feeling the squeeze on their currency value that a tight Federal Reserve monetary policy is pursuing. The strong U.S. dollar is making it tough for these currencies to regain traction right now, but there were problems to begin with. The battle against the dollar is merely exacerbating those issues. Many in Argentina blame the mismanagement of its 2001 crisis (its worst) as a source of continued problems.
One of the lessons from currency crises like these are that fiat currencies are unreliable. As they move through crash or collapse, gold is the safety net that protects wealth. For an extreme example of this, just look at Venezuela.
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.