US dollar on an uptrend
The US dollar (UUP) has been on a fairly upward trajectory in 2018 thus far. Year-to-date, it is up ~4.5% as compared to other major global currencies. The Fed’s interest rate hikes and outlook, trade war concerns, and the better US market (SPY) (QQQ) performance have been the key factors behind the dollar’s strength. This rise in the dollar has put sustained pressure on gold (GLD) and other precious metals year-to-date. It is, however, the outlook that we are interested in, as it will likely be a major deciding factor in the future performance of precious metals.
Fed’s rate hikes and trade wars
The Federal Reserve has already raised the rates three times this year and is expected to raise them for the fourth time in December. Higher interest rates in the US, especially at a time of low or near zero interest rates elsewhere globally, make the US dollar more attractive.
The ongoing trade war has also been supportive of the US dollar in 2018. In fact, the rate on the latest round of tariffs could increase to 25% from 10% at the beginning of 2019, which could further escalate tensions between the US and China and further strengthen the dollar (USDU), at least in the short term.
Moreover, while the US dollar has been the world’s reserve currency for a long time, other countries’ discontent is growing with US dominance, its trade policies, and sanctions. Russia (RSX) has been selling US Treasuries (TLT) and stocking up on gold for a while to reduce its dollar dependence. Moreover, other policies followed by the US administration including the ones on trade could also lead other major economic powers to come together, which could lead to weakness in the US dollar.
If countries and investors push away from the dollar, it could trigger a rally in gold (JNUG). Moreover, there could be a scenario wherein gold prices could rise along with the rise in the US dollar. In October 2018, gold prices rose 2.1% due to increased equity market volatility despite a 2.2% rise in the US dollar index. When geopolitical tensions or uncertainty rises, both have historically risen simultaneously.