Gold Price Will Stay Higher for Longer as Dollar Sure to Weaken Under Trump
The gold price is within striking distance of its old high and is sure to rise as the Fed will have no choice but to inject more liquidity.
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After reaching highs of nearly $2,800 last November prior to the U.S. presidential election, gold fell by 10% into the end of 2024, perturbed by the strength of the dollar and rising concerns on bond yields.
The market kept flip flopping between rate cuts and rate rises as the bond market moved around with the U.S. economic data. Since the Fed embarked on the fastest rate-rising campaign since 2022, investors have been wary of a recession that would be due as the yield curve inverted some years back. At the start of 2024, everyone thought recession would ensue, hoping for a recovery in the second half. It was a choppy year and the bond market moved from pricing in no rate cuts, to pricing in five to six cuts last fall, to almost pricing in none today. This constant change moved the dollar around and asset classes accordingly.
The Fed did nothing other than to "track" the bond market with a lag, rather than lead it. To make matters worse, after being on hold for most of 2024, as the data weakened seasonally over the summer, the Fed panicked and cut interest rates by 50 BPS in September and turned full dovish despite it being a one-off.
They cut a total of 100 BPS in the second half of 2024, when the economic conditions did not really warrant one. This is what caused markets and assets to sell off hard in December as bond market yields rallied by 100 BPS and the market was convinced that the Fed was about to make a policy mistake, or that it knew something everyone else did not. And, certainly, no cuts were necessary following Donald Trump's nomination as his view on tariffs and policies would be seen as inflationary.
These inflationary concerns took the backend of the U.S. bond market all the way to 4.8% on the 10 year. Global bonds were slumping as global inflation concerns were rising. As the dollar strengthened, foreign entities had to sell more dollar assets to raise funds to pay their dollar interest. The dollar wrecking ball was fully at work toward the end of last year.
Despite the dollar strength, gold has continued to rally this year and it is now almost within whiskers of its old high. If one looks at the state of the U.S. economy, it is no doubt slowing down as witnessed by the soft CPI miss. After years of excess fiscal spending, the launch of DOGE is looking to cut $2 trillion in excess spending. The big issue in the market is whether the U.S. economy that has been constantly egged on by the Fed and the government can actually grow with fiscal austerity.
One thing is certain, every time there is a hiccup the Fed has had to inject liquidity. Today, with the U.S. debt-to-GDP ratio north of 120%, one wonders how much they would need to print the next time a "mini" crisis presents itself. Will the AI boom create that productivity that the U.S. so desperately needs and will it be in time before it collapses over its own debt?
The path may be unclear but the destination is certain: The Fed will be forced to inject more liquidity at some point, further debasing the currency. Also, the Fed knows it needs to cut rates any chance it gets without stirring inflation too much, in order to lower its U.S. interest rate expense. This can only mean one thing; the gold price will stay higher for longer.
At the time of publication, Bengali had no positions in any securities mentioned.
