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If the US Dollar Is Still Overvalued, What Chance Does Gold Have?

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The struggling US dollar

Calendar 2017 has been a tough one for the US dollar (UUP) (USD), which has fallen ~10% YTD (year-to-date). While disappointment stemming from President Donald Trump’s flagging agenda has caused the dollar to slide, gains in other currencies such as the euro have added to the US currency’s woes.

Recent geopolitical concerns surrounding North Korea did little to help the dollar’s predicament. Usually, the dollar is considered a safe-haven asset, but the involvement of the US in the North Korean conflict has led other assets such as Japanese yen and Swiss franc to take the lead, leaving the dollar behind.

Of course, expectations surrounding a potential Fed interest rate hike in December are also impacting the dollar.

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COT report

Additional negativity surrounding the dollar came in the form of the latest COT (Commitment of Traders) report released on September 12, 2017. According to this report, net speculator positions added bearish bets on the US dollar in the most recent week, representing the fourth-straight week of a falling USD aggregate position. We are now at the lowest levels of positions reached since 2013.

According to the latest survey by the Bank of America Merrill Lynch, the third-most-crowded trade is currently in US dollar shorts, and hedge funds are positioning themselves for more downside ahead.

US dollar and gold

US-denominated assets are influenced by the strength or weakness of the dollar, and since gold is also denominated in USD, its fortunes are also tied to the dollar among other factors. A strong dollar is negative for gold, and a weakening dollar typically elevates gold prices.

Gold prices, in turn, impact equities such as Gold Fields (GFI), Harmony Gold (HMY), Alamos Gold (AGI), and B2Gold (BTG). The dollar also influences funds such as the VanEck Vectors Gold Miners ETF (GDX).

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