(Kitco News) – The gold market remains in its long-term bull market, but the rally in the U.S. dollar is keeping a lid on prices in what should be a perfect environment, according to the precious metals team at VanEck.
In their latest precious metals report, Joe Foster, portfolio manager and strategist, and Imaru Casanova, deputy portfolio manager for the investment firm’s VanEck International Investors Gold Fund (INIVX), said that the strength in the U.S. dollar is what sets the current gold market bull rally from previous years.
While the strategists remain long-term gold bulls, they said the precious metal could continue to struggle as the U.S. dollar trades around its highest level in 20 years.
The U.S. dollar index is currently trading at 103 points; meanwhile, gold prices remain trapped at around $1,800 an ounce.
“Gold is again serving its historic role as a financial safe haven and store of wealth. However, many gold advocates wonder why the gold price isn’t higher, given all that has transpired,” the portfolio managers said in the report. “While gold and the U.S. dollar sometimes trend higher together in periods of acute financial stress, the normal relationship is inverse. We believe the firm U.S. dollar has muted gold’s advance in the current bull market.”
The widening gap in global monetary policy, with the Federal Reserve leading the charge on interest rate hikes, is supporting the U.S. dollar’s current rally. There are growing expectations that the Federal Reserve will raise interest rates by 50-basis points at the next three monetary policy meetings.
While the U.S. dollar continues to weigh on the gold market, Foster and Casanova said that this environment poses significant risks for the global economy, which could end up supporting the precious metal.
“Aside from a potential debt mess, inflation and rising rates could bring a host of unintended consequences or ‘black swans.’ The first might come from Japan, which has the highest debt/GDP ratio in the developed world. Because of this, the Japanese financial system cannot tolerate higher rates,” the strategists said. “Other countries might feel the sting of a rising U.S. dollar, too. According to the Bank for International Settlements, U.S. dollar debts owed by borrowers outside the U.S. totaled $13 trillion as of the last year’s third quarter. These debts become more expensive in local currencies as the dollar appreciates.”
Along with growing economic risks from surging momentum in the U.S. dollar, VanEck is also bullish on gold as they expect inflation to keep real interest rates low. The strategist said that the last time inflation spiraled out of control in the 1970s and ’80s, the U.S. central bank had to raise interest rates to double the inflation rate.
“Today, the fed funds rate is 0.025% – 0.050%, while Core PCE is at 5.2%. This suggests a Fed Funds rate of 10% is in order, a rate that would likely devastate the U.S. economy,” the strategists said. “Many of the drivers of inflation may have begun as exogenous shocks, but now represent structural changes in the economy.”
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