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Currency war to make gold the ultimate winner - Commerzbank

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(Kitco News) - Renewed strength in the U.S. dollar is putting some significant pressure on gold prices, but one bank sees the start of a currency war and the precious metal could be the ultimate winner.

Gold prices have dropped through critical resistance and are trading near its lowest level in a month as the U.S. dollar and euro battle it out in currency markets. However, commodity analysts at Commerzbank said that investors should look past the near-term noise and focus on the long-term trend.

Gold should emerge victorious in this environment because it cannot be reproduced at the push of a button as the USD, EUR or other fiat currencies can,” the analysts said in a report Monday.

“After all, given the corona pandemic’s negative impact on the economy and inflation, hardly any central bank wants to see an overly strong currency at present,” they added.

The comments come as gold prices test critical support at $1,900 an ounce. December gold futures last traded at $1,904.50 an ounce, down nearly, 3% on the day.

The analysts at the German bank said that Wednesday’s Federal Reserve monetary policy meeting was extremely bullish for gold as the central bank said it does not expected to raise interest rates through 2023. They added that the Federal Reserve’s forward guidance should be negative for the U.S. dollar.

However, there are other factors currently driving currency markets.

According to some analysts, the U.S. dollar is seeing some momentum Monday after European Central Bank President Christine Lagarde said that the European economic recovery remains uncertain, incomplete and dependent on containing the virus outbreak.

Analysts at Commerzbank said that they expect the ECB to continue to talk down the euro as they probably won’t tolerate any further appreciation in the euro.

“Thus a currency war has begun between the USD and the EUR that other currencies may well join,” the analysts said.

Commerzbank said that Federal Reserve Chair Jerome Powell will have his turn to talk down the U.S. dollar as he testifies before Congress this week.

“He is likely to urge members of Congress to approve a new fiscal package now that the Fed has done what it can to stimulate the economy with its new monetary policy orientation. Monetary and fiscal policy thus remain extremely expansionary, paving the way for the gold price to make further gains,” Commerzbank analysts said.

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