Home / Markets News & Opinions / Wealthy Investors Bet Against the Dollar – And That’s Gold Rally Fuel

Wealthy Investors Bet Against the Dollar – And That’s Gold Rally Fuel

Last Updated September 23, 2020 2:24 PM
Joseph Young
Last Updated September 23, 2020 2:24 PM
  • The U.S. dollar is continuing to drop against other reserve currencies and hedge funds are growingly betting against it.
  • Analysts attribute the recent downtrend of the dollar to the rallying euro.
  • The declining value of the dollar sets a positive sentiment around gold, which has already rebounded from its 10% fall.

Hedge funds and wealthy investors are betting against the U.S. dollar for the first time in over two years. The fading dollar, after four months of a downtrend, could catalyze a newfound gold rally.

Analysts have attributed the weakening dollar as the primary catalyst for the precious metal’s upward momentum.

Concerns about inflation, global economic uncertainty, and fiat currencies’ declining value led to the demand for gold. 

dollar index
The U.S. dollar index (DXY) continues to slide as competing reserve currencies gain steam. | Source: Yahoo Finance 

Top Investors Bearish on U.S. Dollar, as Gold Momentum Rebuilds

According to data from the Commodity Futures Trading Commission (CFTC), long positions on the dollar from leveraged funds declined to negative 7,881 contracts. 

The main driver of the deteriorating sentiment around the dollar in recent weeks has been the euro’s strong performance.

On August 11, the number of net long positions on the euro achieved the highest level on record , the CFTC said. Nicolas Vernon, a senior fellow at the Peterson Institute for International Economics, said:

“The budget deal changes the way financial markets look at the euro zone in a significant way. It’s a big reinforcement of the EU and of the euro.”

The confluence of the rising euro and declining U.S. economy is placing additional pressure on the dollar. In the short to medium term, it is likely to benefit gold.

Michael Venuto, the co-founder at Toroso Asset Management, said that in July, gold and the dollar saw inverse correlation. He said :

“During the latter half of July, gold and the dollar have become almost perfectly inversely correlated.”

If the dollar continuously declines, the inverse correlation between the dollar and gold raises the chances of a prolonged rally.

In early August, the price of gold fell by nearly 10% alongside stocks and other alternative stores of value.

gold price
The price of gold recovers swiftly from its 10% drop in early August. | Source: TradingView.com 

The unexpected delay of the stimulus deal in the U.S. caused global markets to drop temporarily.

Since then, gold has rebounded from $1,862 to $1,950, by 4.7% within merely four days.

The strong recovery of gold in a short period demonstrates the momentum of the precious metal.

Video: Gold Sees Fast Recovery From Sharp 10% Drop

External Variables That Might Further Fuel the Precious Metal

Last week, Berkshire Hathaway sold off its entire stake in Goldman Sachs  and trimmed its position on major American banks.

Berkshire’s quarterly shareholder filing shows the company bought one single stock: Barrick Gold.

Barrick Gold, a Canadian gold mining company, has mostly followed the price trend of the precious metal throughout 2020. It is one of the few metal-related companies that outperformed the precious metal year-to-date.

The stock price of Barrick Gold surged by over 9% in after-hours trading over the weekend, following Warren Buffett’s investment.

The sentiment around the safe-haven is noticeably improving, with Buffett building a gold position, which he previously criticized. 

Since the 1990s, when he invested nearly $1 billion in silver , Buffett avoided the precious metal, stating that it has little value.

At Berkshire’s 2018 annual meeting, Buffett said:

“The magical metal was no match for the American mettle.”

The worsening global economy and the declining value of reserve currencies caused the tune around gold to change. A favorable macro backdrop and aggressive fiscal policies could stimulate gold throughout 2020.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.