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The U.S. dollar was up last week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold had a tough week.
The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.
In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.
This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.
Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.
The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.
Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while the gold is showing signs of being oversold.
The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—dollar heading back and gold back up toward the mean.
In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.
This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.
by Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
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Frank Holmes is CEO and chief investment officer at U.S. Global Investors, a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company’s 13 mutual funds include the Global Resources Fund (PSPFX), Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX).
Please consider carefully the fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Follow U.S. Global Investors on Twitter @USFUNDS. Become our fan on Facebook. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
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