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As Dollar Weakens, Get Ready for Strong Gold

Posted by Metals Corporate on

As Dollar Weakens, Get Ready for Strong Gold
By John McDonald

Despite lower unemployment rates than the United States has seen in the past half-century and strong market performance for nearly a decade, the Federal Reserve recently opted to trim interest rates for the first time since the global financial meltdown of 2008.

Jerome Powell, Fed chairman, cited stalled manufacturing growth and anticipation of a “world economic slowdown” as reasons for the cut. While the rate-cutting has a number of analysts in a tizzy, gold investors should be watching the Fed’s move with excitement. 

It is likely just the catalyst gold needs to outperform the market and replicate what Bloomberg strategist Mike McGlone describes as its “monster bull rally in the 2000s.”

McGlone predicted at the end of July that gold could, if the Fed played its cards right for gold investors, be sitting “on a similar launchpad as 2001, when the Fed began an easing cycle.” 

He continued, “The greatest [gold] bull market of this millennium so far began about the time of that first rate cut, following an extended gold-price downdraft and rally in the dollar.”

Gold Might Not Need Much of a Push

While the Fed’s 2001 rate cut was the first of a series and this recent rate cut is, according to Powell, just a precautionary measure that should not be viewed as the first of many, gold could still trend upward for an extended, accelerated run in response to it.

Thanks to a weakening dollar and international banking trends indicating that other countries are backing away from the dollar as a global currency, gold is already in a prime position to appreciate this year. 

The unusual nature of this particular interest rate cut will only exaggerate the effects of this. Because the Fed cut rates when the usual benchmarks for easing were not present and, to further complicate matters, on a smaller scale than most investors (and the sitting president) were anticipating, global markets and national markets are likely to respond by becoming even more volatile and unpredictable than ever.

Volatility and unpredictability tend to be very good for gold values. “A weaker greenback is one of three ‘key ingredients for a gold bull market,” reported research firm Alpine Macro. 

The firm cited “a more accommodative Fed” and “rising geopolitical risk” as the other two factors. Both are clearly in play in today’s market.

Given that no single central bank is currently pursuing higher interest rates anywhere in the world, that “more accommodative Fed” factor could multiple exponentially. 

Alpine Macro researchers wrote, “New all-time highs for gold should be seen in the coming years.” 

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