The following is an excerpt from my December 6th issue of the Mining Stock Journal:
Trumps Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down starting in 2017 to stimulate exports and attempt to cut the trade deficit. The dollar fell from 97 to 88. Gold ran from $1125 to as high as $1360 – a key technical breakout level – by late April 2018. Something had to be done to keep gold from moving higher…Trump started his Trade War in March, which pushed the dollar higher. Gold began tank. Ironically, the trade deficit one again began to balloon.
If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared to do. This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.
I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold.
The other problem with pushing the dollar lower to stimulate exports – or at least attempt to stimulate exports – is the funding of Treasury debt. If foreign investors, who fund a large percentage of Treasury issuance, expect the dollar to decline it will significantly reduce the foreign funds that finance Trump’s spending deficit. That deficit – on-budget + off-budget – will likely end up somewhere between $1.5 – $2 trillion this year…
Refuting the yuan/gold peg theory – When the theory about the Chinese pegging gold to the yuan based on the chart correlation was floated, how come nobody bothered to check the other major currencies vs. the dollar and vs. gold? The dollar has traded higher as if on steroids since late-April. Gold was trading at $1360 in late April. Between now and then it has traded as low as $1170. The yuan began falling vs. dollar in late April. But so did the Swiss franc and yen. The euro began falling vs. the dollar in February.
The charts of the Swissy, euro and yen vs the yuan over the last 12 months are all largely flat over that time period. More to the point, the chart of gold vs all four of those currencies (yuan, Swissy, euro and yen) over the last 12 months looks very similar:
As the chart above shows, the price of gold in all four currencies – yen, yuan, euro, Swissy – has been correlated. The argument could be made that gold is “pegged” to any four of those currencies. The yen, euro, Swissy make up a large portion of the dollar index. Gold is thus not pegged to the yuan so much as it is trading inversely to the dollar, which is expected.