Chart of the Day: Gold and Silver Versus the U.S. Dollar

Wednesday, August 03, 2011

Investors in the precious metals space are no doubt aware that the U.S. dollar has been on a steady decline versus its peers over the last several decades.  The Dollar Index, which tracks the USD against 6 other currencies, including the Japanese Yen and Swiss franc, recently came within a hairs breadth of making a new all-time low on July 26th, during the worst of the debt ceiling hysteria, at 73.45.  The all-time low for the index was hit in March of 2008 at 70.698, just before the mortgage meltdown of 2008.  On May 2nd of this year it hit 72.72 its low since 2008.  Over the last few days the US dollar has made a modest rebound to 74.3.  Unfortunately, this is still close to its all-time low, and compares unfavorably with its level at the start of the year of 80.

Goldcore.com today published a fairly comprehensive overview of the precious metals market.  Included in its analysis was the following chart from Bloomberg.  It shows the negative correlation of the US dollar with the performance of gold and silver since 2000. 



As can be seen, the dollar's depreciation has corresponded with the rise in gold and silver.  There are many factors which have been weighing on the dollar, but they can all largely be summarized as fiscal factors or monetary factors.  For instance, today's near magical recovery in U.S. equities corresponded with a Wall Street Journal report with former Vice Chairman of the Federal Reserve, Donald Kohn who indicated the Fed would certainly consider another round of quantitative easing if the U.S. economy continued to flag, and threats of deflation became pronounced.  Another round of quantitative easing would represent hundreds of billions of dollars of money printing by the Federal Reserve to buy Treasuries in an effort to drive already record low Treasury yields even lower.  For those that might not remember, QE2 was a $600 billion dollar affair. 

Additionally, the recently passed debt ceiling legislation has increased the Federal Government's credit card limit by a cool $2.4 trillion.  It should be no surprise that rising national debt levels correspond with a weaker national currency.  One need only ask Greece, Ireland, and Portugal.  Unfortunately for them, their participation in the EUR has prevented their currencies to weaken in response to their sky-high debt levels.  The EUR however, has indeed been under pressure.  The common refrain in financial markets regarding the EUR and the USD is that they are in a race to the bottom. 

Meanwhile, current budget deficit forecasts for the U.S. of 7%-8% in 2012 and 2013 rely on a 3% GDP forecast.  With the U.S. on the brink of entering a recession now, it seems highly likely that the 3% GDP forecast for 2012 and 2013 will be drastically cut in the weeks and months to come.  Combined with the end of fiscal stimulus, and some fiscal contraction thanks to the very modest deficit reduction measures in the debt ceiling legislation, U.S. budget deficits are likely to be closer to the current run-rate of 10% for the foreseeable future.

Collectively, monetary and fiscal policy outlooks for the U.S. suggests that weak US dollar trends will persist.  This would bode well for silver and gold if the historical correlation between the USD and precious metals continues to hold.  Two notable upcoming events that will likely impact both the fiscal and monetary outlook of the U.S. include Friday's non-farm payroll report for July, and the August 9th FOMC meeting.  A worse than expected payroll report would certainly be dollar negative, as would any hint of QE3 on August 9th. 

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