US trade deficit
The BEA (U.S. Bureau of Economic Analysis) reported the US trade balance for June on August 5. The trade deficit for June widened to $43.9 billion from a revised $40.9 billion—previously reported $41.9 billion—in May. The trade balance is the difference between imports and exports. The market was expecting the trade deficit to be $42.8 billion.
US exports fell 0.10% month-over-month due to the strong US dollar (UUP) while imports rose by 1.20%. Food and automobiles were the two main categories that showed high growth in imports. The stronger dollar usually makes imports cheaper and exports dearer.
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 rise. Over a long period, this leads to a 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 fall in the deficit and vice versa.
The June report for the US trade balance was worse than expected. However, it wasn’t a big enough miss to see much in terms of market reaction. Overall, a worsening trade deficit scenario is usually positive for gold prices and ETFs like the SPDR Gold Shares ETF (GLD).
It’s also positive for gold stocks like Goldcorp (GG), Barrick Gold (ABX), Harmony Gold Mining (HMY), Newmont Mining (NEM), and Kinross Gold (KGC). The ETFs that invest in these stocks like the VanEck Vectors Gold Miners ETF (GDX) are also impacted by the trade balance data. Goldcorp, Barrick Gold, and Newmont Mining are GDX’s 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.