September’s widening US trade balance affects gold stocks

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What is the balance of trade?

The balance of trade is the difference between a country’s monetary value of exports and imports. A positive balance is known as a “trade surplus”—exports are greater than imports. A negative balance is known as a “trade deficit.”

US trade balance

The relative value of the US Dollar Index (UUP) against other currencies is affected by the change in the balance of trade. A trade deficit causes demand for more foreign currency—the imported foreign goods are denominated. US dollar (or USD) outflows increase. Over a long period, this leads to USD devaluation.

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Tracking the US trade balance

The trade balance is reported by the Bureau of Economic Analysis (or BEA) monthly. The overall US trade deficit in goods and services was $43.0 billion in September. It was $40.0 billion in August. The expansion in trade deficit is due to lower exports, which came in at a five-month low. Apart from slowing global demand, export growth is affected by a strong US dollar.

The above chart shows the relationship between gold and the trade balance. Recently, the trade balance has been negative. Since trade balance values are negative, an upward-moving line means a decrease in the deficit, and vice versa. However, the trade balance and gold don’t have a linear relationship like many other variables.

Recently, the trade deficit has widened but gold prices have fallen. This shows that there isn’t a linear relationship here. There’s more affecting gold prices more than this variable, like strength in the US dollar. The expanding trade deficit leads to more pressure on the dollar. A constantly expanding trade deficit is positive in the long term for gold prices and exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD).

An expanding trade deficit is also positive for gold stocks like Goldcorp Inc. (GG)Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Kinross (KGC). It’s positive for ETFs that invest in the above stocks too—like the Gold Miners Index (GDX).

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