Gold Prices Rise in 2019 … Rocks Key Global Currencies and Vice Versa

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Gold prices are on the way up as more and more traders turn bearish and take money out of bullish equity and currency trade positions. 

Make no mistake, the uneasy relationship between gold prices foreign currency fluctuations is both real and potentially damaging in a global economic environment that edges closer to the precipice in the last quarter of 2019 – and heading into the new year.

2020 ‘will be the most volatile year in history’ for investors,” states John Mauldin, of Mauldin Economics. “The last few weeks marked a turning point in the global economy. It’s more than the trade war. A sense of vulnerability is replacing the previous confidence — and with good reason.”

“We are vulnerable, and we’ll be lucky to get through the 2020s without major damage.”

A Shift Toward Protection

Rising gold prices reflect a double-barreled dose of uncertainty and volatility in world markets, as foreign currency investors notice so-called “gold bugs” getting the upper hand in 2019 and beyond.

Take gold prices in relation to the U.S. dollar. Like most investable assets, gold prices can gyrate over time, sometimes excessively so. In more stable economic climates, gold prices will fall as the U.S. dollar rises against other global currencies. 

In times of significant economic uncertainty, and as the dollar loses momentum, gold values begin to appreciate as the commodity grows more valuable than the dollar and other global currencies. For months, currency watchers have opined that the dollar is overvalued in late 2019, as global savings rates decline, the euro picks up steam, and U.S. economic growth in possible “peak” mode, according to economists. 

Morgan Stanley has taken note, and is calling for an 8% decline in the U.S. dollar by the end of 2020, as global demand for the dollar starts to dry up in volatile currency market conditions.

 “In all, we could see a vicious cycle emerging, as dollar weakness makes holding USD assets less attractive, driving asset de-risking and in turn, repatriation and dollar weakness," says Hans Redeker, Global Head of FX and Emerging Market Strategy for Morgan Stanley.

Gold Rising

With currency traders seemingly vexed over the U.S. dollar, demand has risen for the commodity that plays like a currency – gold.
With gold prices hovering around $1,500 (they’re traded in U.S. dollars), up 18% on a year-to-date basis, after falling by 1% in 2018, investors are on a gold buying spree. China and Russia are at the front of the line, buying up gold in a major effort to reinforce their own currencies, as holding physical gold as it represents a tangible asset to a nation’s own currency.

Yet propping up its own currency isn’t the only reason countries buy up gold in uncertain economic times – these issues come to the fore, as well.

Inflation – Gold is widely known as an effective hedge against rising inflation in the U.S and abroad (the U.S. inflation rate stands at 1.8% in July, 2019, up from 1.6% from the previous monthly reading.) When inflation rises and the dollar weakens, gold prices invariably rise – and that’s the case in the third quarter of 2019.

For industrial and retail reasons – Gold is also widely popular as a component in jewelry, in medical tools, and for industrial and manufacturing usage. Prior to 2019, demand had been relatively moderate and this the demand for gold climbed in 2019, bringing prices up with it.

For portfolio protection – When uncertainty reigns in global markets, investors are encouraged to stock up on physical gold and on gold stocks and funds. As other investments edge toward questionable status, gold can serve as a valuable hedge against declining equity markets – and that’s what the market is seeing now.

Gold, Forex = Unpredictable Partners

Gold and foreign currencies have as much in common as they have differences.

  • Both are susceptible to major geopolitical shifts (the U.S/China trade war and Brexit come to mind)

  • Both are imbalanced by major central bank moves (like the U.S. boosting interest rates after almost a decade of zero-rate policies. 

  • Both can be rocked by major commodity shifts, like a significant move in the price of crude oil.

With the global economy in defense mode and talk of negative rates and a U.S. recession hanging over the global economy, it looks like this time, it’s a combination of all the above that is pushing gold prices higher and key currencies like the dollar and the pound lower.

If Morgan Stanley has it right, that scenario may not be changing for the better anytime soon.

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