Let’s go back to the numbers. The US dollar index is up 15% in 2022, offset by a -8.7% decline in gold so far. If we assume that the dollar’s strength still has momentum to 116 points (a very important resistance that it reached in 2000), this means a decline in gold by regarding 3%, and this means a loss of gold $ 50 per ounce to reach $ 1615 (March 2020 at the beginning of the pandemic).
Considering that market sentiment is changing rapidly and algorithm trading plays a very important role, we have to expect severe fluctuations that may not be taken into account or, let’s say, outside the numbers calculations (don’t forget how gold fell strongly in one week from regarding $ 1,700 to $ 1525 in March 2020 with The beginning of the pandemic exactly, i.e. a severe loss that reached 10%), then if the US dollar index returns to 120 points (it also reached it in 2000), then we add a 2% loss on gold, to reach then $1580.
What I want to say is that all the real fears of stagnation and deflation, which may not be easy in America, Europe and Britain, especially, and the slowdown of China, give justification for the strength of the US dollar as a safe haven (hypothetically) because the return on it is higher than the rest of the major currencies (a negative interest rate hike for stocks, bonds and the dollar is The best option at least now), but at the same time and technically, the cycle of the strength of the US dollar between 8/10 years is almost approaching its peak, and this means that the momentum in the rise of the US dollar will begin to decline (within six months from now), and we should not forget that the US dollar index achieved 19% gains in five years.
What I see now is that the global economy and financial markets are misreading what is going on and not pricing the real risks even with their current decline. The solution when the economy declines will not be other than repeating history for itself with huge cheap liquidity because governments and central banks have decided that it is the easiest practical and electorally successful measure, instead of doing structural reform of the economy. We know that it will never happen because simply no one is willing to take the blame, and this reform The radicalization of economics will take time while everyone is in a hurry to achieve a political electoral victory for the major policy makers.
Historical reading and comparison
First: between the years 2013 to 2015, gold lost regarding -40% of its value, then the US dollar index was making gains of regarding 25% (it rose from 79 points to regarding 100 points), while US inflation was fairly stable at 2%, what does it mean that? This means that the loss of gold approximately -10% in 2022 until now remains within expectations without turning into a collapse because inflation remained high and historically despite the strength of the US dollar in 2022 (the US dollar index is high 15% in 2022).
Second: What kept gold at the current levels is the record inflation only, and otherwise, the losses of gold would have turned into a collapse at a rate higher than the current losses.
Third: If inflation begins to decline (it will happen gradually in the coming months), and interest rates do not decline strongly (remaining in the range of 2% to 2.5%) without having to return to the low interest policy, then it can be said that gold will suffer severe losses. This is a scenario that may happen in one case: if the US and global economic decline is light next year without entering into a real recession and not a technical recession as happened in the first and second quarters of 2022.
Fourth: When gold achieved gains between 2016 and 2018, interest rates in America were rising from the level of a quarter of a percentage point to 2%, while the US dollar index was declining from 102 points to nearly 90 points. So the main criterion here was the weakness of the US dollar.
The result:
1 – The US inflation index remains the common factor in all these years that maintained gold’s cohesion (limited rise or losses).
2 – The US dollar index must decline in order for gold to start rising once more.
3 – The Fed has not yet begun to reduce its budget, as expected, and as it said at the beginning of the year, and this means that it still has tools to use and sell $95 billion per month of the assets it bought to support the economy due to the pandemic. Here is a very important question: Is this US Federal Reserve really serious regarding fighting inflation?
4 – The race is now between whether the recession will happen faster or stopping the rate hike will be sooner than the markets expected?
5 – The option to buy real gold remains logical with everything that is happening. No one knows when we will reach the bottom or where the price of gold will stabilize at its minimum.
6 – No one forgets China and its currency, the yuan, which fell 10% once morest the dollar this year, and this is in line with the decline in gold. If the People’s Bank of China intervenes to support the currency and this may happen then it will be in favor of gold once more.
In all these scenarios, which may seem complicated to some, it does not seem that the strength of the US dollar is the goal in the first place, and the worst is that the high interest will arrange trillions of dollars on the benefits of servicing the US debt (US government debt). The world has changed from what it was in the eighties and nineties, and whether America entered into a recession or not, there is always an economic cycle of interest as the general trend has remained downward since the eighties of the last century and is not expected to change now.
Mazen Salhab
