US dollar weakness
The US dollar’s weakness may be a major driver behind gold’s higher prices. Since gold prices are dollar denominated, the dollar and gold are usually inversely related. As the Fed’s dovishness has increased due to ongoing trade tensions and weaker economic reports, the odds of rate cuts have increased. In fact, CNBC reports traders are now pricing in 100% odds of a Fed rate cut in July.
Fed rates and the dollar’s attractiveness
As the US dollar’s attractiveness to foreign investors could decline if US interest rates (TLT) fall, the greenback has been pressured for the last month or so. The Invesco DB US Dollar Index Bullish ETF (UUP), which tracks the dollar’s move against major currencies, has fallen 1.6% in the last month alone. It has fallen especially hard compared with the Swiss franc and Japanese yen. Meanwhile, the SPDR Gold Shares ETF (GLD) has risen 9.7%. The dollar’s weakness is strengthening gold.
Gold and the dollar
Gold’s future largely depends on the dollar’s outlook. The higher US twin deficits continue to dictate a weaker long-term outlook for the dollar. The Fed is expected to ease more than other central banks around the world, which could be detrimental to the US dollar. Moreover, Trump has been quite vocal about his desire for a weaker dollar, and many high-profile investors, including “bond king” Jeffrey Gundlach, have started talking about the end of the dollar’s rally.