Gold has rallied 30% in 2020 and is up a staggering 600% since 2000. Meanwhile, the U.S. dollar is down 10% against the dollar index since March 23. Not coincidentally, March 23 was the day that the Federal Reserve announced their plan for unlimited quantitative easing in response to the economic collapse.
Is gold’s rally simply a response to the perception of the currency policies? In our recent discussion, veteran trader Jack Bouroudjian called the current environment “the perfect storm for gold due to the Fed and the economy.”
A Monetary Phenomenon
CME Group senior economist Eric Norland noted that “gold is a monetary phenomenon and reflects both Fed and other global central bank policies”. My contention is that gold’s buoyancy is reflecting a couple of things.
The first is Fed policy. In August, the Fed voiced a commitment to pursue 2% inflation per year. This comes after years of Fed members expressing frustrations over their inability to spark inflation. The metals market appears to be respecting this new commitment. There is also something new that the metals market may be reacting to. The federal government has begun expanding budget deficits and the national debt is at once unthinkable levels. In January 2017, U.S. national debt was at 20 trillion dollars. It’s now at 27 trillion.
The Dollar's Real Strength
Historically currency markets frown on elevated debt loads. The dollar index has been the traditional measure of dollar strength for many years despite serious flaws. The Euro holds 56% of the weighting in the index and the Yen 14%. So 70% of the dollar index is made up of other currencies that represent countries that maintain high debt loads. This narrow focus is giving an obfuscated picture of dollar strength. If you were to measure the dollar against the Swiss Franc it tells a much different story.
The Swiss franc, a currency with more reasonable debt loads, is up 90% against the dollar since 2000. It may take a combination of measures to ascertain the dollar’s true value, and the metals market, particularly gold, should be front and center. Gold is often a market worth watching. With the uncertainties seen in 2020 and the policy responses to that uncertainty, that remains especially true now.
Watch the full OpenMarkets Roundtable discussion in the video above.
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