Forex Comment Aug 04

Gold resumes climb as US dollar struggles

The US economy is on life support and Congress can't even agree on recharging the batteries in the life support machines

Gold resumes climb as US dollar struggles
What will the White House come up with next?  Attorney-General Barr, left, talks to President Trump. Photo: Getty/AFP.

(ATF) After a brief pause on July 30, when gold (generic 1st 'GC' Future) dropped sharply for a day to $1,966.80, 'GC1' has recovered and now (7pm HK time) trades at $1,992.80.

As I wrote at the time, it was a blip and not a change in trend.

How, indeed, could it have been?!

Gold is "end-of-the-world" insurance, and though I don't think the end is nigh, for many people in the US it surely must look that way.

There is no early end in sight for Covid-19, new deaths are continuing to climb, the US economy is on life (i.e. Fed) support and Congress can't even agree on recharging the batteries in the life support machines.

Perhaps the scariest part is the combination of a Fed balance sheet that has grown from $4 trillion in February to $7 trillion at present and – as forecast by Bank of America and others – likely to rise to $10 trillion by end-December, amid inane ideas in the White House on using the dollar 'weapon' in its losing economic battles with China.

Financially and economically, the US has very little to offer to the American people let alone to the world at this point, other than the hope of at least hanging on to the dollar's global reserve status and thereby protecting its global markets dominance. If the Trump administration now threatens to withhold use of the dollar to punish other nations, dollar demand could quickly collapse and accelerate the dollar decline – and, of course, gold ascendancy.

There is clear evidence that US economic recovery is a long ways off and that weaponising the dollar by a desperate Trump administration remains a real possibility. Under these circumstances, gold could easily climb to new highs of $2,500 to $3,000 and conceivably much higher if political inanity gains additional ground.

The dollar (on the dollar index DXY) traded as low as 93.2800 this afternoon in Hong Kong. It has made a bit of a recovery since then to 93.5390 by 7pm. But that's merely a brief technical adjustment as US equity futures struggle; there is no change in fundamentals. The US Congress must provide massive additional funds to prevent the bottom from falling out of the economy and that's the principal force weighing down the dollar.

Meanwhile, the Chinese currencies are maintaining their strength. The CNY is trading at 6.9830 after an intraday high of 6.9788, a five-month high. The HKD is flush up against the upper limit of its pegged trading range, at 7.7501, close to where the HKMA has to buy US dollars to keep the HKD from strengthening beyond its highest permissible level.

Well, at least someone is buying the struggling greenback.