US Dollar ang Gold Prices

I will attempt to share my analysis on the US economy, direction of the US dollar and gold prices.

From the 1970s to the 1980s, the US experienced high inflation, with Federal funds rates soaring to 14% during that decade and the price of gold increased 25 times.

Is gold a good bet now? While high interest rates can lower the price of gold, high inflation can push it up.

If interest rates do not exceed the inflation rate by a large margin, the inflation push on gold prices can exceed the interest rates.

There are more conflicting signals from the market: The US had a strong employment market, but GDP declined, and this can be attributed to the transformation of the US economy and how US changed the computation of unemployment rates. The high interest rates environment saw a decline in high-profit industries such as finance and technology, leading to significant layoffs, and a rise in low-profit manufacturing and service industries, leading to increased hiring of lower-pay and part-time jobs.

As a result, GDP and unemployment rates diverged. The excessive rise in labour costs caused the cost of returning businesses to the US to skyrocket, making it difficult to short the US dollar as borrowing costs are too high. The US dollar needs to increase significantly in value for shorting the currency to be profitable. If the US Fed funds rate has already reached 5 to 5.25%, and the US dollar has not appreciated, when will it be possible for the US dollar to appreciate?

The global trend towards de-dollarisation is heating up, with BRIC countries preparing to expand, and it is clear that they are competing with the US dollar. Once a new trading currency or settlement mechanism appears, the demand for the US dollar will rapidly decline. The US dollar's smile curve does increase during economic downturns, but it has never faced the challenges of the past de-dollarisation trend before a recession. Therefore, being too optimistic about the US dollar is not a good thing.

Since there is currently no currency eligible to challenge the US dollar, gold may continue to rise under the de-dollarisation trend. The US dollar strengthened throughout the high inflation period in the 1980s but this time it has shown a different pattern. Michael Hartnett, the Chief Investment Strategist at Bank of America, predicts that the US dollar has entered a bear market and is expected to fall 20% in the long term. The US dollar has been weaponised too much, causing the world to want to abandon it. In the past six months, the US dollar has fallen, and the price of gold has risen, indicating that these views are not wrong.

Investors can continue to go long on the US dollar, but the US debt problem will only continue to grow as the US dollar's hegemony is challenged. The creditworthiness of US bonds will continue to weaken, and the US will expand its debt ceiling before June, meaning that it will continue to print money and raise debt, diluting the US dollar further.

The collapse of Silicon Valley Bank can be considered a Lehman Brothers’ moment, and there are more black swans waiting to happen. However, the Fed knows very well that the US dollar can only maintain its value by increasing interest rates and the Fed has to be more hawkish than European Central Bank's Governing Council in raising the Fed funds rates.  However, the current bearish trend on the US dollar is not just various investment institutions borrowing to short it; it is a coordinated effort by central banks around the world to short the US dollar, leading to a significant amount of selling of US bonds and dollars, which must have resulted in losses for countries that have them. Some could be on the verge of collapsing in the next few months. 

It is increasingly likely that the US inverted yield curves will begin to have a greater impact, potentially leading to more black swan events for countries and companies struggling with high levels of debt.

Superphang
http://superphang.blogspot.sg  

Keep cash and be ready for market crash

I believe the Fed Reserve will keep raising Fed funds rate to about 6.5% before they stop raising it further. However, the recession may come before the rate hits 6.5%.  They have basically no choice as they know that the Fed funds rate has to be higher than inflation rate in order to ensure that the inflation is fully under control. Whatever the Fed reacted so far was not to frighten off the market players so much so that market will not crash prematurely.  

The conflicts between China and the US will get more intense. China perceives that the US often fails to follow through on its commitments. For example, the US may make promises on trade agreements but then enact policies that undermine those agreements. Despite this, China should continue to prioritize openness and convenience for foreign investors and trade partners, as well as maintaining order and market stability.

China's investments in technology and skills, supported by government initiatives, are likely to result in cheaper products and increased trade. Also, China's large market is likely to be attractive to foreign investors. However, it's important to recognize that there may be concerns around intellectual property protection and regulatory challenges.

In contrast, US government policies that create conflict in business trading with China could have negative consequences for US businesses, including a potential decrease in production volume and an increase in production costs, which could only aggravate inflationary pressure.

From history, it is about time for the inverted yield curve to make the US economy go into recession between the period from June to September 2023. 

The simple and logical thing we can do now is to keep cash and get ready for the market crash.

Prescientsuper
http://superphang.blogspot.sg