The latest forecast released last Monday from America’s second-largest bank–Bank of America Merrill Lynch (BAML)–was a bit unusual. BAML projected both strength in the US Dollar and precious metals.
Why is this so unusual? The dollar and gold typically have an inverse relation; when one goes down, the other tends to go up. But in this case, they projected the that both the dollar and gold will rise, with gold reaching $1,400 an ounce, and silver reaching around $17.50 by the end of 2018. In short, it’s an inversion of an inversion.
To what do they attribute to gold and silver strength at a time when the dollar is at one-year high? Three factors:
- Increasing geopolitical tensions
- Global trade wars
- Rising inflation
As BAML analysts reported, “We note that the business cycle is maturing and the ongoing uncertainty around trade is not helping at this junction.” They also noted that concurrently, “inflation has been picking up (shorting Treasuries is one of the most crowded trades), a combination which may ultimately bring gold buyers back into the market.”
This report comes at a time when gold, now at $1,251, had fallen approximately 8% from its April highs, and silver, plunging 12% to its current price of $15.98. For precious metals investors, the current economic factors in which escalating global tensions and domestic inflation are prevalent may prove to be a real boon for those who enter the markets, purchasing gold and silver, both at their lowest point this year.
But precious metals aren’t the only story. BAML also sees the dollar strengthening against the Euro, which makes up the bulk of the US dollar index.
Contributing to the dollar’s rise is the complicated mess that is the current “emerging markets crisis.” What’s going on with emerging markets? Quite a few things:
- Dollar strength, faster growth, and rising interest rates–all signaling the potential for higher returns on US investments–are attracting money from around the world.
- Stalling growth, trade battles, increasing debt, and rising interest rates have made emerging markets significantly vulnerable to risks that some economists liken to the Asian financial crisis of the late 1990’s.
- Countries such as South Africa, Indonesia, and Russia among others that are dependent on foreign investment are vulnerable to a massive capital exodus, as investors opt for higher growth potential and less risk such as to be found in US investments.
- Countries with poor governance and poor monetary policy–Turkey being not only the prime example but also the hardest-hit emerging market nation–are driving away foreign investment as such a prospect would be deemed too risky.
- And last but not least, encouraged by cheap debt after the 2008 financial crisis many developing nations began selling bonds denominated in dollars which attracted investors who preferred US to domestic currency. But the stronger dollar now makes it exceedingly difficult for borrowers to repay their debt as it takes increasingly more local currency to obtain the necessary amount of dollars to repay their debt.
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