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Category: Bullion Bulletin

Bullion Bulletin: Currency moves and gold

The Dollar-denominated gold price has weakened recently and that demands an explanation. Surely, when inflation is soaring, gold ought to be doing wel...

4 September 2022

Gary Mead

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The Dollar-denominated gold price has weakened recently and that demands an explanation. Surely, when inflation is soaring, gold ought to be doing well?

It all depends on what one means about ‘doing well’.

The Dollar price of gold has lost about 4.5% since the start of this year. But other asset classes have done rather worse.

The Dow Jones Industrial Index since the start of January was down by 11.8% by 29 August. The S&P 500 has dropped by more than 15%, the Nasdaq by more than 23% and Bitcoin is down by a whopping 58%.

This has combined with weakness in a number of currencies, especially those of emerging markets. The Indian Rupee has lost 7% of its Dollar value since the start of the year; the Philippines, Thailand and South Africa currencies have dropped by around 9% against the Dollar, and the Turkish Lira by 27%. Currencies of developed countries, such as the Euro, the British pound, Japan’s Yen, the Swiss franc, the Canadian Dollar, and the Swedish Krona have also lost ground to the Dollar, about 13%.

The weakening of these other currencies has seen gold rise significantly when measured in their terms. When measured in Euros gold has gained almost 7% since the start of the year; in Japanese Yen the gain so far this year is more than 13%. And in Pounds Sterling the gold price is so far this year up more than 9%.

For more than a year, the US Dollar has slowly been strengthening relative to other major currencies, and has touched a 20 year high. The Dollar is trading around par with the Euro. The Dollar tends to strengthen whenever the global economy experiences a crisis (and we have crises galore right now), as nervous investors seek out what is traditionally a safe place to park their money – which has long been the Dollar. Not only that, but America’s central bank, the Federal Reserve now appears finally to be getting serious about tackling inflation. Federal Reserve Bank of Richmond President Thomas Barkin has promised that the bank will do “what it takes” to get inflation back to its target of 2%. Jerome Powell, chairman of the Fed, said recently that it must “keep at it until the job is done”, widely seen by financial markets as indicating the Fed will continue to raise interest rates – causing the Dollar to strengthen further.

Many analysts are now expecting a recession to hit the Eurozone, the UK, and the US, defined as two successive quarters of declining economic output over the course of the next year. Historically, the gold price has tended to advance in recessions, although this is by no means a guarantee.

Higher interest rates in the US mean not only a stronger Dollar and therefore a disadvantage for American exporters, but a higher cost of US borrowing. The Congressional Budget Office (CBO) this year calculated that annual interest payments on the national debt will total $399 billion this year; by 2052 the CBO estimates that interest payments on the current trajectory will take nearly 40% of all federal revenues.

The Dollar looks safe – for now.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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