Gold or Greenbacks? How Should You Invest?

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During the first week of May, gold was hovering around $1,313 per ounce. The price of this precious metal, and store of value, and is down 1.79% over the past 30 days. It is up 2.43%, or $31.10 over the past 6 months, and 7.13% ($87.40) over the past 1 year. The performance of gold is interesting, given the increasing interest rates at the Federal Reserve Bank.

Since gold is a dollar-denominated asset, price movements with gold depend heavily on the strength of the USD. Whenever the dollar appreciates, this means that the foreign exchange value of other currencies relative to the USD depreciates. In other words, more Forex is needed to purchase the equivalent ounce of gold. This drops the demand for gold and this is precisely the reason there is an inverse relationship between gold and the strength of the USD.

It is interesting to point out how gold has performed over the past 16 years in different currencies. For example, in USD, gold has averaged 9.8%, in AUD 7.6%, in CAD 8.2%, in CHF 7.5%, in CNY 8.0%, in EUR 9.0%, in GBP 11.3%, and INR 11.8%. The average annual performance of gold is on par with some of the best inflation-beating investments on the market. The current inflation rate in the US is 2.4% – its highest level all year and in over 1 year. Consumer prices increased steadily in March 2018, thanks largely to the increased costs of automobile prices, and living costs.

Increasing prices will gain fresh new momentum with the price of WTI crude oil and Brent crude oil. Current geopolitical uncertainty vis-à-vis the US’s intent to renegotiate the terms of the Iran deal are creating a degree of turmoil in the oil markets. We are seeing oil prices rising sharply now that the world is uncertain whether Trump will renew any deals. On Monday, 7 May 2018, oil prices were at a 3.5 year high – closing above $70 per barrel. Brent crude oil was particularly bullish, based on bearish geopolitical sentiment and looks likely to continue rising as we approach the deadline on Saturday, May 12, 2018, and beyond.

The US dollar index is currently trading around 92.80. This is an important barometer of the overall strength or weakness of the USD. When the DXY is rising, as it currently is, more foreign currency is required to purchase the equivalent USD. The DXY measures the US dollar against a basket of 6 currencies including the GBP, JPY, CAD, CHF, SEK, and EUR. The most heavily weighted currency in the mix is the EUR. For the year to date, the 5-day performance of the USD has appreciated by 1.05%, and 3.30% over 1 month.

Olsson Capital trading analyst Singeon Truman points out the stellar performance of the USD recently, ‘…between February and April, the DXY has risen 3.63%, allowing the year to date gains to reach 0.74%. This all bodes well for dollar purchases, and sales of other foreign currency. On May 7, the USD hit a 4-month high, driven in large part by higher inflation prospects vis-à-vis rising oil prices. The interrelatedness of markets, combined with a near 100% likelihood of a Federal Reserve Bank FOMC rate hike on June 13, 2018 will continue delivering strong gains for dollar bulls. If interest rate projections go as expected, the federal funds rate will increase in the region of 1.75% – 2.00%. This will strengthen the greenback further, and probably result in more call options for USD pairs.

 

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