- A strong dollar caused by aggressive interest rate hikes has diverted demand away from gold
- Several factors including recession, global interest rate hikes and dedollarization will weaken the dollar
- Investors are seizing the chance to buy gold before its price rises again as the dollar drops
Gold to Rise as the Dollar Fades
To paraphrase an ancient Chinese proverb, the best time to buy gold was twenty years ago, the second-best time is right now. Due to market forces, now is an ideal buying opportunity for gold. Investors can lock in the benefits of diversifying with precious metals before the price of gold shoots up again.
Inflation is frustrating the Federal Reserve. It hasn’t budged from its forty-year high despite a blistering series of interest rate hikes meant to tame it. What the rate hikes have done is drive up the value of the dollar. The dollar will continue to surge as rates continue to rise. The Fed is believed to be raising rates at its next two meetings. They like a strong dollar because it lowers the costs of imports. This creates a backdoor way to better inflation numbers. The Fed is willing to overlook the damage a strong dollar does, like reducing the value of American company foreign earnings and increasing the costs of debt held in dollars.
The aggressive rate increases have all but guaranteed a recession. These factors have led investors to seek out the dollar as a safe haven investment. As a result, they have moved away from gold, allowing the price to slip.
Challenges to the Dollar
Conditions are opening a short window to get a great deal on gold. A Bank of America survey of major fund managers found 68% of them believe the dollar is overvalued. Wells Fargo predicts the dollar will fall in 2023. By then, they believe the US recession will be bad enough to motivate the Fed to slow down its interest rate hikes. Wells Fargo thinks the Fed will keep cutting rates the deeper the recession runs. As interest rates come down, so will the value of the dollar.1
The dollar’s rapid rise is also due in part to the Federal Reserve raising rates faster than other central banks. Foreign investors were drawn to the dollar’s growing yield. The greenback was viewed as a store of value for them as their local currencies and securities sank. But other central banks are now raising their rates to fight inflation. The dominant position of the dollar will fade against other currencies as rates match up.
The strength of the dollar is facing another challenge. There is a global movement towards ‘dedollarization‘. The US weaponized its currency against Russia after the outbreak of the Ukraine war. Other countries quickly realized the need to move away from the dollar as a reserve currency. China is leveraging the size of its economy to turn other countries away from the dollar and towards to the yuan. This reduction in demand from central banks will further devalue the dollar.
When the dollar ultimately drops, investors will return to gold. Dollar exchange rates have been clouding the true demand for gold that exists right now. It’s only against the US dollar that gold seems to be less wanted. Gold priced in British pounds is up 2.3% in the last 30 days. Gold in the Australian dollar is up 6.6% in the last 30 days and up 1.24% in the last six months.2
Overall, the global demand for gold will go back up as will its price. Gold will be sought to preserve wealth as currency devalues from inflation and recession. That’s why savvy investors are locking in gold now. Stocks, bonds, and real estate are all set to continue falling well into next year. Nouriel Roubini is a professor of economics at New York University’s Stern School of Business. He has demonstrated that the US is heading into a very painful and extended period of stagflation. He advised, “Investors need to find assets that will hedge them against inflation, political and geopolitical risks, and environmental damage: these include gold and other precious metals.”3 Contact us today to learn why the timing is right to get Gold IRA.