How Trumponomics Torpedoed Gold Prices

Gold’s not been having a good year, and you can lay the blame at the door of Trumponomics.

Gold bars. Photographer: Carla Gottgens/Bloomberg

What happened?

Gold prices hit their high for the year of $1,358 a troy ounce on January 24 this year. Since then the journey has been downhill all the way reaching a low of $1,174 on August 16, according to data from Bloomberg. The price has recovered to $1,184 recently.

That’s drop from high to low of around 13.5% over a period of little more than six months. It is a move that investment pros would say is firmly in correction territory and on the way to a bear market. Corrections involve a price decline of more than 10% whereas bear markets are drops over 20%.

The fall can be blamed on a surge in the dollar over roughly the same period. The value of the trade-weighted dollar index vs. major currencies rose 7% from 85 on January 24 to 91 on August 10, according to the latest data available from the St. Louis Federal Reserve at the time of writing.

Because gold prices are measured in dollars when the dollar strengthens the value of gold must fall. Some people go further and say that the dollar is determined by how much gold it will buy — thus when the gold price drops it must mean that the dollar’s value has jumped. We can say with certainty that you can buy more gold with a dollar than you could six months ago (see above.)

Why is this happening?

The reason the dollar is rallying is due to the blend of economic policies that are currently being pursued in the U.S. Notably short-term interest rates are rising and expected to keep doing so. Plus the government is spending even more than it collects than usual (partly as a result of the Trump tax cuts.) In short, the Trump administration is pursuing a looser fiscal policy while the Federal Reserve is pursuing tighter monetary policy.

A recent report from New York bank Brown Brothers Harriman highlights this fact.

Tighter monetary policy and looser fiscal policy could be the closest thing to an elixir for currencies.  It is the policy mix that the US is pursuing.  

As a result, the report says, the capital is flooding into the U.S. “[F]oreign investors bought $417.4 bln of US assets in Q2, the most in any quarter for a decade,” according to U.S. Treasury data cited by the BBH report. In other words, the current economic policies are a magnet for money from around the world.

In the simplest terms, that inflow of cash means foreigners are buying dollars pushing up the value of the greenback. It will likely make the U.S. economy grow even faster than it would have done.

But the consequence of these twin policies is also that gold prices are getting crushed.

However, investors should not worry because other investments will likely do better during this period. You can read more on that matter here.

 

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