The global economy continues slowing down, bit by bit. As US monetary policy grows more restrictive and China attempts to restructure its economy, and as the window for a trade agreement between the two superpowers seems to be closing, the outlook is growing dimmer by the day. So, why is that relevant for the dollar and for gold?
As mentioned in earlier posts, we expect the trade war between the two aforementioned giants to grow tenser. Until Donald Trump won the election and took to the center of the world stage in November of 2016, the tensions had flurried up periodically. But, generally, they festered in the background. President Trump is obviously determined to take a different tack.
He does not represent the GOP party line. Nor does he back big business all that clearly. To the contrary, he has positioned himself as the defender of the interests of the average Joe. He promised fair trade and jobs for American workers. And he seems determined to deliver on his promises (which is, admittedly, very unusual for a politician).
It remains to be seen whether the tactics and style that worked for President Trump in his real estate business can be successfully applied to international trade and politics. What we do know is that business people, politicians and investors appear increasingly concerned. Financial markets are seeing the beginnings of a downturn as the global economy slows down – which is, however, not entirely attributable to Trump-ism.
These uncertainties will continue to be reflected in a continued economic slowdown globally. OECD leading economic indicators have already declined to their lowest levels since the last recession. One of the broadest measures of economic activity in North America is the Cass Freight Index. It suffered another 3.3% decline year-on-year in April.
Cass Freight Index™ – Shipments, YOY Percentage Change
Source: Cass Information Systems, Inc.
Only a few months ago, the consensus was pointing to more rate hikes by the US Fed. However, as the economic landscape and the stock markets continue to weaken, the expectations now are increasingly turning toward a more dovish monetary policy in America.
Indeed, we have seen the Fed become increasingly dovish over the past weeks and we are starting to see officials hinting at a rate cut. Of course, once they return to a supportive and accommodative policy direction, we don’t expect it to end with just one cut. To the contrary, based on the overall context, you should expect a series of cuts, and possibly a complete change of monetary policy in America. Further declines in equity markets can be expected. And, as those markets decline, the Fed’s policy will once again turn toward easing.
This change of tide is starting to have an impact on the Dollar as well as on precious metals.
As the dollar’s yield spread versus other currencies declines, the dollar will correct. This is particularly good news for gold investors. Gold has crossed the US$1’300 mark decisively. And the news gets even better when considering the fact that gold climbed slowly even while the dollar rallied to new highs in the past weeks. This is bringing back gold investors.
The bottom line from our perspective: Sell USD and buy gold and gold mining stocks!