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Key Takeaways
- Dollar weakness is a “tailwind” for gold prices, Morgan Stanley’s metals and mining strategist says.
- Precious metals experts see gold’s rally continuing, but they see a chance of near-term volatility as investors take profits.
One asset’s weakness can be another’s strength. That concept has added fresh complexity to rising investor demand for gold.
Case in point: Spot gold prices continue to rally, breaking past $5,300 on Wednesday following a drop in the greenback yesterday. While it has regained some ground today, the Dollar Index—which tracks the currency against a basket of foreign counterparts—recently dropped to its lowest level in four years after seemingly sanguine comments from President Donald Trump about a weaker buck.
Those comments may be helping gold’s recent rise, already aided by the perception of increased geopolitical risk, inflation, government debt levels and the expectation of lower interest rates. Traders now appear to be working in the possibility that the slide in the greenback was the Trump administration’s goal, not just a consequence of increased uncertainty about U.S. policy.
WHY THIS MATTERS TO YOU
While some investors may be cheering on the prospect of a continued rally in gold, its gains at the expense of a weaker dollar wouldn’t be helpful to the average person in the U.S. A lower dollar means less purchasing power.
Trump, during a visit to Iowa yesterday, was asked whether he was comfortable with the dollar’s decline. “I think it’s great, the value of the dollar,” he said. “If you look at China and Japan, I used to fight like hell with them, because they always wanted to devalue.”
Those words will stoke “genuine lines of thought among market participants that this may merely be the opening act of a more coordinated policy effort from the Trump administration to actively pursue a weaker dollar,” Matthew Ryan, head of market strategy at financial services firm Ebury, said in emailed comments.
A weaker dollar could make exports relatively less expensive for foreign buyers, reduce the trade deficit, and raise the value of multinational corporations’ profits outside the U.S.
“The dollar’s supremacy is cracking,” Nigel Green, founder of financial advisory firm deVere Group, wrote Wednesday morning. “When leaders and policymakers appear unconcerned about sharp declines, traders assume volatility will persist.”
Some dollar watchers are now looking toward what Fed Chair Jerome Powell might say about the dollar later today after the central bank’s latest interest-rate decision. Over the longer term, many strategists expect gold prices to continue climbing, and weakness in the dollar—another haven asset—could propel the metal even higher.
A confluence of other factors are working in the metal’s favor, according to Amy Gower, Morgan Stanley’s metals and mining strategist. “We are seeing generally good investor appetite for real assets,” she said in a Wednesday interview with Squawk Box Europe, adding that central banks’ cutting rates tends to be good for nonyielding assets like commodities. “Further dollar weakness would be an additional tailwind.”
Morgan Stanley last week wrote that the dollar’s “biggest challenger” remains gold, with the precious metal’s share of central bank reserves, as of the end of September, eclipsing U.S. Treasurys for the first time since 1996.
The risk of a gold pullback, however, is becoming more likely, according to HSBC’s chief precious metals analyst James Steel. “This near parabolic move in gold does invite volatility and does invite profit-taking on any positive news that might come out,” he said in an interview with Bloomberg Wednesday.
