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The U.S. Dollar is a Crowded Trade – Why this Matters for Gold - An Educational Series # 2 - Trey Reik

The U.S. Dollar is a Crowded Trade – Why this Matters for Gold - An Educational Series # 2 - Trey Reik
By Sprott Global Resource Investments Ltd. 2 years ago 1454 Views

Trey Reik is a Senior Portfolio Manager and Precious Metals Strategist at Sprott Asset Management USA, a division of Sprott Inc., a Toronto-based alternative asset manager. He is also the author of The Sprott Precious Metals Watch, a monthly newsletter produced by Sprott Asset Management LP.



February 17, 2016

In a recent report by Sprott Senior Portfolio Manager Trey Reik, he points out several reasons why gold remains not only an important portfolio diversification tool, but also an asset class ripe for a rebound. In his full length report, available here Trey notes that one of the reasons to look to gold is the current state of the U.S. dollar: “U.S. dollar sentiment among western investors has become close to unanimously bullish.” We examine the impact of this on gold.

A strengthening dollar is good for American consumers. We are able to buy more goods at a lower price than the rest of the world. However, for American producers who export, a strengthening dollar means fewer international customers are able to buy our goods, and quantity demanded often declines in such an environment. That’s where Economics 101 ends and Trey begins.

Trey cites a CFTC chart that shows the combined net speculative long and short trades of the euro, the Yen, and the pound against the dollar.

Take a look at 2015. After a big jump throughout the first half of the year, there has been somewhat of a reversal, indicating that speculative traders would now rather have yen, euros or pounds than U.S. dollars. This is a signal that the U.S. dollar has potentially already topped in value, relative to the currencies of other developed nations. But how does this relate to gold?

Trey’s chart shows the combined speculative demand for USD relative to other currencies. To show a bit more detail, we also broke out the different currencies, and marked the foreign exchange rates of the yen, the euro, and the Canadian dollar to zero as of January 1, 2010. While the above graph combines all CTFC (a.k.a. futures traders’ expectations), this chart shows the spot (actual) price movement of the currencies over the last four years. Gold is often considered a corollary currency, so we’ve added in the spot gold price (like the forex rates, gold is denominated in USD. The line is marked in red).


This chart illustrates not only the strengthening of the USD over the other currencies, but also gold’s resilience during an inflationary environment. While gold prices have certainly declined as the USD rises, it might be small comfort to see that gold loses less value than other currencies, it also appears to recover more quickly. This chart also shows that gold behaves like a currency, but one that is not easily manipulated by central bank policy. Gold mitigates some deflationary risks.

Trey speculates that the USD is as strong as it will get in this current market cycle, and we may be looking at the top of the market for the USD. Indeed, his next chart, titled “Net Foreign Purchases of Treasuries” demonstrates that foreign buyers are now net sellers of U.S. Treasuries (in reality, this is an indication that they have nothing left to sell, or that everything else that they hold is marked below cost. They don’t want to take a loss any more than you do!)


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information.

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