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, or exports that are greater than imports. A negative balance is known as a trade deficit.
The relative value of the US Dollar Index compared to other currencies is affected by changes in the balance of trade. A trade deficit means foreign goods are in demand, which increases the demand for foreign currency. Then outflows of the US dollar (or USD) increase. Over a long period, this leads to USD devaluation.
US trade balance
The trade balance is reported monthly by the U.S. Bureau of Economic Analysis (or BEA). The overall US trade deficit in goods and services was $ 41.8 billion for January compared to $45.6 billion for December. January exports were $189.4 billion, down $5.6 billion from December.
The US trade deficit, excluding oil, hit a record high in January. Overseas economies, including the Eurozone and Japan, are weakening. This is leading to lesser import appetite. On the other hand, the US economy is doing relatively well, which is leading to increased imports. Despite this, the trade deficit is either steady or improving mainly because of cheaper oil.
The above chart shows the relationship between gold prices and the trade balance. Since trade balance values are negative, an upward-moving line means a decrease in the deficit, and vice versa.
Meanwhile, the trade balance and gold don’t have a linear relationship. There may be other stronger variables affecting gold prices, such as the strength of the USD.
An 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 ETFs such as the SPDR Gold Shares (GLD).
An expanding trade deficit is also positive for gold stocks such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), and Kinross Gold (KGC). It’s also positive for ETFs that invest in these stocks, such as the VanEck Vectors Gold Miners ETF (GDX). GG, ABX, and NEM are its top holdings, making up 26.2% of its total assets.