Relentless Dollar Rise Squashes Gold Again

As Bob Dylan said, “You don’t need a weatherman to know which way the wind blows.”

Indeed, you don’t need to be an expert to understand why gold prices are being pushed down today (or yesterday, or the previous days). The U.S. dollar is simply crushing every other market in sight. Gold is, however, off its lows for the day in mid-afternoon.

The Dow and S&P are somewhat stable as bargain hunters have come into the arena. The NASDAQ is holding steady. But crude, bond yields, and currencies are slumping in the face of the dollar onslaught. Base metals are up modestly.

(West Texas Intermediate crude fell today on news of increased U.S. inventories, exerting a tug on regular trading of gold today. The yellow precious looked for help to counteract the robust buck. None was to be found.)

What is fascinating is that the reactions in these markets (with the exception of crude oil), are stem from a speculative impulse based on the question: “When will the Federal Reserve raise interest rates?” We are hard pressed to find evidence that the answer to that question is “soon.”

Yet the equities sell off is in full plumage, gold is reacting as if its balloon had been popped, and the dollar is reaching into the stratosphere. Parity with the euro looms as a distinct possibility. So we have to ask better questions.

What actions that other nations or associations of nations are taking right now are forcing the dollar higher? We all know that Europe’s QE has begun and predictably, European equities have been moving higher. U.S. and Asian equities are mixed to marginally up.

A second question we should ask is, “What is a productive spread between the American and European central banks’ interest rates, both the official and marketplace rates?” We’re seeing the effects of simply a “scare” from potential, though not realistic, rate rises in the U.S.

The truth of the matter is that the U.S. simply can’t let those spreads get too large by initiating a rate rise. It would be disastrous for exports and cause a production slowdown just as Americans are becoming comfortable with their revived economy. (Yesterday we pointed out that there are 5 million job vacancies going wanting in the U.S.) We certainly don’t want to see an American slowdown just so Europe can revive itself after hesitating, regarding stimulus action, for five years.

Additionally, more and more economists are predicting that the higher dollar will shave a significant percentage off the core inflation rate. J.P. Morgan says that shave number is 0.4%. That would move U.S. inflation to the 1.1 to 1.3% range, which is not acceptable. A higher interest rate would push that number even lower and point toward stagnation.

A rising dollar is a de facto rate increase because, as inflation goes down, the inflation-adjusted interest rate goes up, and that matters enormously to the Fed.

Think: “It’s all relative.”

On the bright side, Americans will be flocking overseas for vacations because of the strong dollar. The downside to that is that fewer Europeans will be visiting tourist meccas in the U.S., especially New York, their favorite destination.

Meanwhile, until we get some physical demand for gold on the horizon – it will have to be from China – and a fiscal policy from the United States government, the dollar will continue to rise. The stock markets will fall. The Fed has carried the burdens of setting economic policy for too long. Would the government please start governing?

This would be an ideal time to begin undertaking the huge infrastructure deficiencies we all know need attention. Spending some of the dollar’s gain will help deflate it and create jobs.

Wishing you as always, good trading,