Let’s go back to the numbers. The US dollar index rose 15% in 2022, offset by gold’s -8.7% decline so far. If we assume that the strength of the dollar still has momentum at 116 points (a very important resistance it reached in 2000), that means a drop in gold of around 3%, and that means a loss of $ 50 an ounce gold. to reach $ 1615 (March 2020 at the start of the pandemic).
Considering that market sentiment is changing rapidly and algorithm trading plays a very important role, we must expect strong fluctuations that may not be taken into account or, let’s say, outside of the numerical calculations (don’t forget how gold fell strongly in a week from about $ 1,700 to $ 1525 in March 2020 with The beginning of the pandemic precisely, which is a serious loss that has reached 10%), so if the US dollar index returns to 120 points (it has reached it also in 2000), then we add a 2% loss on gold, to then reach $ 1580.
What I mean is that all the real fears of stagnation and deflation, which may not be easy in America, Europe and Britain in particular, and the slowdown in China, justify the strength of the US dollar as a safe haven (hypothetically) because the yield is higher than the rest of the major currencies (a negative increase in interest rates 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 nearing its peak, and this means that the upward momentum of the US dollar will begin to decline (within six months from now), and let’s not forget that the US dollar index has made gains of 19% in five years .
What I see now is that the global economy and financial markets are misinterpreting what is happening and are not evaluating the real risks even with their current decline. The solution when the economy declines will be just repeating history for itself with huge cheap liquidity because governments and central banks have decided it is the simplest and most successful practical measure, instead of reforming. structural economy. it will never happen because simply no one is willing to take the blame, and this reform The radicalization of the economy will take time as everyone is in a hurry to secure a political electoral victory for key policy makers.
Historical reading and comparison
First: between 2013 and 2015, gold lost about -40% of its value, so the US dollar index gained about 25% (it went from 79 points to about 100 points), while the US inflation remained fairly stable at 2%, what does that mean? It means that the gold loss of around -10% in 2022 so far remains within expectations without turning into a slump because inflation has remained high and historically despite the strength of the US dollar in 2022 (the US dollar index is high of 15% in 2022).
Second: What has kept gold at current levels is only record inflation, otherwise the gold losses would have turned into a slump at a rate higher than the current losses.
Third: if inflation starts to decline (it will gradually happen over the next few months) and interest rates do not fall sharply (staying in the range of 2% to 2.5%) without having to revert to low interest policy, then it can be said. that gold will suffer heavy losses. This is a scenario that could occur in one case: if the US and global economic decline is slight next year without entering a full-fledged recession and not a technical recession as it did in the first and second quarters of 2022.
Fourth: When gold made gains between 2016 and 2018, interest rates in America rose from the level of a quarter of a percentage point to 2%, while the US dollar index fell from 102 points to almost. 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 all these years that has maintained the cohesion of gold (limited increase or losses).
2 – The US dollar index must go down for gold to start rising again.
3 – The Fed has not yet started reducing its budget, as planned, and as mentioned earlier this year, which means it still has the tools to use and sell $ 95 billion a month of the assets it has purchased to support the economy due to the pandemic. Here’s a very important question: Is this US Federal Reserve really serious about fighting inflation?
4 – The race is now between whether the recession will happen faster or whether 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. Nobody knows when we will reach the minimum or where the price of gold will stabilize at the minimum.
6 – Nobody forgets China and its currency, the yuan, which fell 10% against the dollar this year, and this is in line with the decline in gold. If the People’s Bank of China steps in in support of the currency and that can happen, then it will be in favor of gold again.
In all of these scenarios, which may seem complicated to some, it does not appear that the strength of the US dollar is the goal in the first place, and the worst is that the high interest will result in trillions of dollars in the benefits of the US debt service (US debt). US government). The world has changed from what it was in the 1980s and 1990s, and regardless of whether America entered a recession or not, there is always a business cycle of interest where the overall trend has remained down since the 1980s. of the last century and is not expected to change now.
Mazen Salhab
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