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A Blow to the Gold Rally: New Data Show Dollar’s Decline Isn’t Major

Last Updated September 23, 2020 2:19 PM
Joseph Young
Last Updated September 23, 2020 2:19 PM
  • Gold’s price has declined for three consecutive days–the longest stretch since April.
  •  An alternative gauge shows the U.S. dollar has not dropped substantially in recent months.
  • Precious metal investors still believe the dollar is in a bear market.

The price of gold is up nearly 18% since July 1, but the rally could be in jeopardy after new data showed the U.S. dollar’s decline had been overstated.

In recent months, analysts primarily attributed the uptrend of gold to the fading dollar. The dollar’s decline against other reserve currencies due to various macro factors fueled bullish sentiment around gold. 

However, an alternative dollar index provided by the Federal Reserve suggests the dollar has not dropped substantially in July. 

Priced in U.S. dollars, gold is down 4% from its peak in the last 24 hours.

gold dollar
The price of gold against the U.S. dollar. | Source: TradingView.com 

Fed’s Trade-Based Dollar Index Shows a Minor Drop of 0.9%

According to Bloomberg’s data, the U.S. Fed Trade-Weighted Real Broad Dollar Index dropped by only 0.9% in July.  

The conventional dollar index showed a 4.1% decline last month, leading to caution in the markets.

Marshall Gittler, the head of investment research at BDSwiss Group, said it is critical to use a weighted index. A wide range of variables, like previous rallies, could affect how the dollar’s performance is measured.

The Fed’s dollar index showed a 3.6% drop in the dollar  in the past four months. A small drop is not sufficient to predict a catastrophe, which analysts previously said would catalyze a major gold rally.

Gittler emphasized that the dollar’s performance since April is nowhere close to being a “catastrophe.” He said:

Back in April, the recent peak, the dollar’s real value was the highest it’s been in nearly 18 years. That was the extraordinary move, not the recent decline.

Two charts published by economist Daniel Lacalle show the U.S. dollar is highly oversold. | Source: Twitter 

Coincidentally, the price of gold fell for three consecutive days for the first time in April.

On August 7, gold peaked at $2,074. Within the last 72 hours, the precious metal fell to $1,983, recording a minor pullback.

If the market overreacted to the declining dollar, there’s a good chance that gold’s ascent can slow or even consolidate in the near term.

In a column published by Nasdaq, Gittler further explained that the U.S. dollar index (DXY) is not accurate :

Finally, the ultimate reason why I think this whole issue is nothing to get excited about: the DXY index is not an accurate measure of even the dollar’s nominal value, much less its real value.

Video: State Street Strategist Says Dollar Weakness Could Benefit Gold

Gold Investors Unfazed

Avid gold investors, like Peter Schiff, believe the U.S. dollar is on a steep decline. 

Schiff, who pinpointed the dollar’s weak performance as the driving factor of gold’s rally, stated :

I wonder how long it will take equity investors to realize that a collapsing dollar and soaring gold price are bearish for stocks, as it will force the Fed to dump bonds, forcing interest rates to surge, the Federal Government to slash spending, and corporate earning to plunge.

In late July, Schiff hinted that the economy could topple if the dollar loses its reserve currency status. Maintaining a positive stance towards gold, he added :

The entire house of cards that defines the U.S. economy rests on the foundation of the dollar’s reserve currency status. Lose that, and the economy topples.

In the near-term, the price of gold has a technical support level of $1,980. Defending the support area could reduce the likelihood of a more significant correction.