Gold futures jumped 0.7% in early Asian trading on Monday as the U.S. Dollar Index fell another 0.4%, leaving the gauge of the greenback’s strength hovering near a two-month low of 99.3.
The U.S. dollar has long enjoyed the status as the world’s reserve currency, but the greenback’s esteemed standing is increasingly being challenged as China and Russia show their eagerness to to diversify away from the U.S. dollar. EverBank World Markets’ Mike Meyer wrote:
In recent years, the BRICS countries — Brazil, Russia, India, China and South Africa — have been taking small steps to reduce the primacy of the dollar in international trade. China has been leading this effort in recent years.
I recently came across this headline published by the South China Morning Post: Moscow and Beijing join forces to bypass U.S. dollar in world money market. You see, Russia and China have been working towards stronger economic ties for years.
The latest sign of this cooperation happened March 16, when the Central Bank of Russia opened its first overseas office in Beijing. The local news called this “a small step forward in forging a Beijing-Moscow alliance to bypass the U.S. dollar in the global monetary system.”
The weakness in the U.S. dollar can be partly attributed to recent doubts about the reflation policies favored by U.S. President Donald Trump. Gold prices typically rise when the U.S. dollar falls.
Macquarie Research, which is a gold bull, says that instead of obsessing with the U.S. monetary policy, investors also need to paying closer attention to fiscal policy. The broker offers three interesting scenarios for the gold price: Firstly, if the world economy can ride a wave of reflation, then industrial commodities and cyclical equities can benefit at the expense of gold and bonds. But Macquarie places only a 20% probability on this scenario.
However, if the global economy endures stagflation, which is a combination of slow growth and higher inflation, then gold and real estate will benefit at the expense of equities. Macquarie sees a 30% probability for this scenario.
Macquarie most favored scenario, with a 50% likelihood, is the global economy returns to disinflation (a drop in the rate of inflation), in which gold will be the biggest beneficiary.
Macquarie sees gold ending the year at $1,350 an ounce. Gold was trading at $1,256 an ounce this morning.
Gold miners are the biggest winners on Monday morning amid broadly weaker Asian markets. Australia’s Evolution Mining (EVN.Australia) soared 4.4%, Resolute Mining (RSG.Australia) jumped 3.7% and Newcrest Mining (NCM.Australia) gained 1.6%.
Year-to-date, the SPDR Gold Trust (GLD) has gained 8.4%, the VanEck Vectors Gold Miners ETF (GDX) has risen 9.6%, while the PowerShares DB US Dollar Index Bullish Fund (UUP) has retreated 2.7%.