US dollar’s strength
The US dollar’s (UUP) strength has been the primary reason for gold’s weakness in 2018. The dollar has been gaining against the euro as the region grapples with its economic and political woes.
A “no-deal” Brexit seems to be a real possibility now, which is impacting the British pound and the euro. Moreover, the economic concerns in Turkey, as well as Italy, are also leading to a weaker euro, helping the dollar.
Back at home, the strong economic data, as well as the Federal Reserve’s monetary tightening, is also helping the dollar become stronger. The relative performance between the US and the rest of the world as well as the policy divergence is also favoring the dollar.
Prolonging commodities pain
While the US dollar has reached a 13-month high, gold prices are nearing 19-month lows. All commodities are facing downward pressure due to the stronger dollar.
Although the dollar seems to be moving from strength to strength, many market participants have started talking about it peaking. The recent Turkey crisis has provided another boost to the dollar, which might prolong the pain for commodities.
Morgan Stanley’s view
Morgan Stanley analysts also believe that the US dollar is “topping out,” as reported by Bloomberg. The analysts cited a number of factors that could lead to a sell-off in the dollar, which include:
- comments from President Donald Trump on currencies, including the strong US dollar
- weaker US economic (VTI)(SPY) survey indicators
- Chinese economic measures
- potential tweaks to the Bank of Japan’s policy
Although the US dollar has been gaining as a safe-haven asset as trade concerns heighten, a further escalation could leave it vulnerable. This would be beneficial for gold (IAU) and gold equities (GDX)(NUGT), which are essentially a levered play on the precious metal.