2018: A Breakout Year for Gold Prices
It's time to get very excited about gold again.
2018 is going to be a breakout year for the yellow metal.
And smart investors are preparing now.
The price of gold has increased almost 9% since bottoming out in December. Gold for immediate delivery was last seen trading near $1,350 an ounce. This is the highest the yellow metal has traded since Brexit in the summer of 2016. And there are many catalysts that still aim to drive gold prices to multi-year highs this year.
Among the 2018 catalysts for rising gold prices are a general correction in U.S. equities, increasing inflation, a more aggressive interest rate policy from the Fed, a Bitcoin and cryptocurrency collapse, and rising global nuclear tensions, just to name a few.
But right now, the price of gold is being mostly driven upward by a falling U.S. dollar.
The U.S. Dollar Index — a measure of the greenback's value against a basket of six foreign currencies — has dropped as much as 3.7% in the past month and has now fallen below key retracement levels. Last year, the USD Index fell by almost 10%.
There are many factors working against the dollar. But chief among them is a stronger euro.
The euro has experienced an incredible recovery over the past several months as economic conditions in the eurozone continue to exceed expectations. The Trump administration would hate to admit it (they'll probably just ignore it), but while the U.S. economy is growing at a healthy rate, Europe's economy is growing even faster.
Initial estimates show GDP growth in the EU reaching 2.5% last year, the best period of growth for the eurozone since 2007.
By comparison, the Commerce Department reported last Friday that U.S. GDP grew by 2.3% in 2017. This was quite shy of Trump's 4% GDP growth promises.
Stronger growth in the EU compared to the U.S. has pushed some investors into the euro and out of the U.S. dollar. But does having a strong dollar really matter?
The value of the dollar recently made headlines amid back-and-forth comments between Treasury Secretary Steve Mnuchin and President Trump. Mnuchin said a weaker dollar would be good for trade. Trump then immediately fired back, saying Mnuchin's comments were “misunderstood” and that “ultimately, I want to see a strong dollar.”
I'm not sure if Mnuchin's comments were really misunderstood, or if Trump's response was just market-calming rhetoric aimed at the mass retail market. Either way, here's what Mnuchin meant...
A weakening dollar would increase the purchasing power for foreign buyers of U.S. exports. In theory, this should result in higher exports of manufactured goods and spur corporate/economic growth.
However, a weakening U.S. dollar also means imports to the U.S. become more expensive because the purchasing power of the dollar is weakened against other foreign currencies.
A strengthening dollar, on the other hand, decreases the purchasing power for foreign buyers of U.S. exports. In theory, this should result in lower exports of manufactured goods but increased purchasing power for the dollar, making imports more affordable.
In short, a devaluing currency allows a country to get a better price when selling exports. And a currency increasing in value allows a country to get a better price when buying imports.
Ultimately, a nation wants to control the value of its currency in both directions to meet market conditions. Sometimes it wants to increase the value of its currency; sometimes it wants to decrease it. But none of this really matters to most of the retail market.
At the end of the day, investors just want to see gains. Strong dollar... weak dollar... I suspect it doesn't matter to most as long as they're making money. And they are.
Despite the value of the U.S. dollar dropping almost 10% last year, 2017 was one of the best years for U.S. equities in recent history. So I don't think the market really cares about a strong dollar or has any good motivation to try to support it.
That's good news for gold.
Despite being officially decoupled for nearly 50 years now, gold still generally trades inverse to the U.S. dollar. The greenback remains the world's top reserve currency, and gold's role as a currency hedge remains fully intact, despite the recent popularity in cryptocurrency alternatives. There is still no better asset to own amid a falling U.S. dollar than gold.
Right now, I'm advising all subscribers to begin buying both physical gold bullion and gold stocks again. 2017 was the year for cryptocurrencies as a monetary alternative. This year, the king of all money alternatives, gold, will reclaim its rightful role as the world's key monetary asset.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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