Gold prices hit a four-month high last week, gaining support as the U.S. dollar went down and the risk of a government shutdown loom. In fact, the greenback hit three-year lows on Monday.
Why is the dollar under pressure? Three reasons:
1.Inflation is back and stronger than expected. Underlying U.S. consumer prices just recorded their largest increase in eleven months.
2.Investors are weighing the risks of a potential U.S. government shutdown at the end of this week. Political rancor continues to rise.
3.Alternate reserve currencies like the Chinese yuan are gaining momentum for global commerce.
On Monday, GOP leadership confirmed that a long-term spending accord could no longer be completed in time to avert government shutdown this Friday. Now the focus is on a short-term funding bandaid, which faces heavy opposition from Democratic leaders.
This could lead to the first government shutdown for the U.S.A. since 2013.
No surprise that other global financial powers, which used to admire the U.S. dollar above all others, are looking for alternatives.
Altavest managing partner Michael Armbruster thinks that nation states – both those that are friendly and those that not friendly with the U.S. – are moving away from the dollar for international trade and currency reserves.
Even though the U.S.A. has been doing better economically recently, global investors are still wary of the country’s long term fiscal trajectory.
Mark McCormick, North American head of FX Strategy, said “while inflation could start to perk up this year, it is not a given the Fed will react to it. That could leave US real rates lower, which would bury the [U.S. dollar].”
The U.S. Labor Department reported that the Consumer Price Index, excluding the volatile food and energy components, rose 0.3% last month as prices for new cars, used cars and trucks and motor vehicle insurance increased.
Gold has traditionally been a hedge against inflation’s corrosive effects on other assets. This is one key reason why retirement investors consider adding gold to their assets to help diversify their dollar-based paper assets.
INVESTMENT PROS SEE INFLATION AS GOOD FOR GOLD
John Hathaway of Tocqueville Asset Management L.P. recently wrote that gold prices have room to rise due to several factors such as higher inflation, overvalued financial assets, favorable demand and supply trends, a deteriorating U.S. fiscal position, passive investing risks and a weaker U.S dollar.
Hathaway recommends investors consider an allocation to physical gold to reduce their downside exposure when markets are under stress. Hathaway believes U.S. budget deficits as far as the eye can see could cause gold to perform well over the long term.
Vertical Research metals expert Michael Dudas’ 2018 year-end target for gold is $1,400. He thinks higher inflation expectations in 2018 may be strong enough to push gold prices even higher.
According to Dudas, extra demand and capital spending from the recently enacted tax cuts could lead to rising wages and inflation.
GOLD OUTPERFORMS SINCE LAST RATE RISE
Gold has performed better than most major assets since the Fed raised rates last month. Bloomberg Intelligence analyst Mike McClone notes that since the December rate hike, gold prices are beating stocks, the U.S. dollar and bitcoin.
In fact, since December 12, 2017, the day before the Fed acted, gold went up over 5% to over $1,300 an ounce, touching its highest level in three months.
The S&P 500 Index was up 3.1%, bitcoin was down 14% and the U.S. dollar fell 1.5% during the same period.
According to McClone, gold could shine if weakness in the greenback continues.
BANK OF CHINA SEES A COMING COMMODITIES REVIVAL
The Bank of China thinks the stage may be set for higher gold prices. Their analysts expect gold could average $1,400 per ounce by the fourth quarter of 2018.
Chief Bank of China head of commodity market strategy Xiao Fu favors gold in an environment of economic growth, weakness in the U.S. dollar, falling bond prices and elevated stock prices. Bank of China’s expectations for gold are consistent with China’s investors’ general wariness about US. Treasuries, a trend that has weighed down the bond market and pressured the U.S. dollar.
The yuan recently climbed to a two-year high, giving Chinese buyers (already the world’s top metals consumers) even more purchasing power. Gold could be a beneficiary of this capital flow.
INFLATION IS BACK AND GOLD STANDS TO BENEFIT
Underlying U.S. consumer prices just recorded their largest increase in eleven months and inflation could gain even more momentum in 2018.
Economists think a tightening labor market, rising commodity prices and a weak U.S dollar will lift inflation this year.
We may be at a turning point with respect to the U.S. dollar and physical gold can be a convenient way to hedge risk and mitigate the effects of inflation.
It could be the perfect time to take more control over your financial destiny with physical precious metals.
