The dollar has been a major factor in gold’s lack of upside in recent months. The Dollar Index has moved up to its highest level in years as the Federal Reserve signaled its plans to continue raising interest rates aggressively. The Fed has, thus far, continued to do so with another 75 point rate hike taking place just this month. Whether the Fed elects to hike by another 75 points in December remains up in the air, however. Some recent inflation data such as CPI and PPI have pointed to a possible slowing of inflationary pressures. Should that trend continue, the Fed may keep raising rates but may do so at a much more tolerable pace for markets.
Any dovishness that may seep into the Fed’s thinking and language this month could be a major obstacle for the dollar. The rise seen in the greenback over the last several months is likely due almost entirely to the market’s outlook on interest rates. If that outlook were to change, so too might the outlook for the dollar. Thus, a major reversal could be seen in the currency that could take it back below the 100 level.
The dollar has strengthened this year even as some issues point towards a move away from it. The dollar remains the global reserve currency of choice, but how much longer it retains that status is a big question. Other nations, such as China, have already pushed for more recognition of their own respective currencies at the global table. Some counties have already established various credit lines to begin transactions outside of dollars.
This week’s news about Ghana buying oil with gold is important. The move is yet another in a series of antidollar “waves” that may see more and more of them coming down the road. The price of both oil and gold is set by paper on various exchanges such as Comex and Nymex. More global players are beginning to step away from this model, however, as they now want a seat at the pricing table. Saudi Arabia, for example, recently reportedly said it did not want to allow the pricing of oil to take place on paper in New York. The rules for international trade appear to be on the verge of major change, as more countries look to set their own prices for the goods they produce.
Major global powerhouse institutions, such as the Nymex Exchange, have long been charged with determining and setting the global price of oil and other commodities. That could be coming to an end, however, as the move away from the dollar gathers a fresh leg of steam.
If the dollar does begin to weaken, it could have a profound impact on the gold market. A stronger dollar makes gold relatively more expensive for foreign buyers and may slow buying of it. A weaker dollar has the opposite effect and may fuel a rally in gold. Although a major move away from the dollar is highly unlikely this year or even in the coming years, it is an economic factor that needs to be monitored. Any further suggestions of or actions by countries that are a negative for the dollar could potentially send gold skyrocketing higher to new all-time highs.