US trade deficit shrinks in April
The BEA (U.S. Bureau of Economic Analysis) reported the US trade balance for April on June 3. The trade deficit for April came in at $40.9 billion. This is 19% lower than March. The trade balance is the difference between imports and exports.
The deficit expanded to a six-year high in March, when it came in at $51.4 billion. As we had discussed in our previous update on the trade balance, the huge gap between exports and imports was most likely due to the resolution of the labor dispute at West Coast ports. This would have a one-time effect on the trade balance.
This normalization of port activity is the main reason behind the trade balance shrinking as imports returned to normal levels. On a month-over-month basis, the trade deficit declined by 19% to $40.9 billion in April.
While exports gained 1% in April, led by commercial airplane sales, imports fell 3.3%. The strong US dollar (UUP) has made US exports more expensive while imports have become cheaper.
Impact on gold
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 that foreign goods are in demand. This increases the demand for foreign currency. It causes outflows of the dollar to increase. Over a long period, this leads to devaluation of the dollar.
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.
An expanding trade deficit leads to more pressure on the dollar. As a result, it’s usually positive in the long term for gold prices and ETFs like the SPDR Gold Shares ETF (GLD).
An expanding trade deficit is also positive for gold stocks like Goldcorp (GG), Barrick Gold (ABX), Harmony Gold Mining (HMY), Newmont Mining (NEM), and Kinross Gold (KGC). It’s also positive for ETFs that invest in these stocks like the VanEck Vectors Gold Miners ETF (GDX). Goldcorp, Barrick Gold, and Newmont Mining are its top holdings. They account for 20% of its total assets.
In the next part of this series, we’ll discuss the Consumer Sentiment Index reading for the US and why it’s important.