August 2024 - Week 4 Edition
The Fed’s New Commitment to Rate Cuts Fuels More Gold ETF Buying
On Friday, August 23, at the central bankers’ retreat in Jackson Hole, Wyo., Federal Reserve Chairman Jerome Powell uttered the eight words the world has been waiting for: “ The time has come for policy to adjust.” He continued, stating that “The direction of travel is clear,” adding “the cooling in labor market conditions” was “unmistakable.” To be clear, the Chairman is saying that, without doubt, he would cut interest rates in September.
Wall Street responded by pouring even more money into gold-backed exchange-traded funds (ETFs), after first surging into gold ETFs in July. As of last week, holdings in the SPDR Gold Shares, one of the leading gold ETFs, rose for eight straight weeks, since July 1 st, the longest run since mid-2020, amid COVID fears. Even before Powell spoke, Citigroup said it sees inflows into gold ETFs expanding “significantly” over the next six to 12 months, predicting that gold could reach $3,000 by mid-2025, up another 20% from its $2,500 price before Powell spoke.
The Dollar is Down 5% in the Past Two Months, Supercharging Gold’s Rise
A big part of gold’s recent surge is the sudden collapse of the U.S. dollar in the past two months. The U.S. Dollar Index (DXY) began the year at 101.33, then rose almost 5% in the first half of 2024 to peak at 106.05 on June 26 before declining sharply. It is now at 100.81, down 5% in two months and down slightly (-0.5%) year-to-date. The immediate cause of the drop is anticipation of interest rate cuts, making the dollar less attractive to foreign investors. However, the bigger reason why the dollar fell and will likely continue to decline is the high and rising budget deficits by the Biden-Harris Administration. These issues will likely become far worse if Harris wins, with her announced spending plans and her $5 trillion in tax increases, which only tend to slow growth and send businesses overseas.
On June 26, when the U.S. Dollar index peaked, gold was under $2,300 per ounce and now it is over $2,520, up nearly 10%, or about double the drop in the dollar. So, about half of gold’s gain in the past two months was due to the falling dollar and about half due to a mixture of other new influences The rise of Kamala Harris and the chance the wrong side wins in November, plus the escalation of the wars in Ukraine and the Middle East along with America’s rising budget deficits were all factors in the dollar’s retreat.
As the Biden-Harris Administration keeps running up budget deficits of nearly $2 trillion per year, we should pay attention to what happens when big governments run deep budget deficits for too long. Our budget deficits currently run at 6.3% of GDP, but in Brazil, deficits are running at 10% of GDP, and the Brazilian currency, the real, is becoming weaker, and will likely be devalued.
Lula de Silva has been Brazil’s president for only two years, but he has racked up spending so large that he has raised interest rates to 10% in an attempt to lure investors. His plan is not working as he is not attracting many buyers, so he is now expected to devalue the real, or raise rates to 10.5% soon.
These are some of the reasons why gold and silver have risen by over 20% this year, with an added surge in July and August, amplified by a falling dollar. Further surges are possible due to uncertainty in the fate of the dollar and an uncertain election outcome in November, plus the escalation of major wars and unrest around the world facing a lame-duck president and his unqualified vice president, who is now surging in the polls. This is the time to load up on gold. Call our professional account representatives today to add gold to your financial plan.
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Gold’s Continued Rise Keeps It A Solid Investment Buy
Gold reached another all-time high on Monday, August 26, trading above $2,520. Silver also rose popping back above $30 per ounce for the first time since July 17, as the U.S. dollar has fallen over 5% so far in July and August, boosting gold by nearly 10% in the last two months. In the futures market, the December 2024 gold contract rose $44 on Monday to trade at $2,552.70.
