The dollar hindering the rise of gold

On May 12, the results of the China-U.S. trade negotiations exceeded expectations, and gold retreated from the historical high of $3,501/ounce on April 22 to around $3,200/ounce.

The medium to long-term upward trend of gold may still be intact, but the short-term upward momentum has been weakened.

1. Discrepancies in trading levels have widened. Since November 2021, gold has risen by more than 100%, and the gold price adjusted for M2 has basically reached the historical peak range.

From a technical indicator perspective, the net long positions, divergence, and trading volatility of gold prices have all shown a downward trend.

1. The credit of the U.S. dollar will not collapse in the short term.

Historically, the reasons that have promoted gold bull markets are multiple, and the continuous decline of gold or the onset of a bear market often begins with a strengthening dollar.

Taking the typical two rounds of gold peak declines as an example: 1) In 1980, the Federal Reserve raised interest rates sharply to curb inflation, tightening policies boosted the dollar, and gold prices turned downward. 2) In 2011, the Federal Reserve signaled the exit from QE, the European debt crisis temporarily eased, the dollar rebounded from the bottom, and gold prices began to weaken.

Currently, we believe that the dollar will not continue to weaken:

1. Trade agreements are gradually being reached. On May 8, the UK and the U.S. confirmed the first tariff agreement; on May 12, China and the U.S. issued a joint statement on economic and trade issues in Geneva, with negotiation results far exceeding market expectations. The uncertainty risk of trade is gradually decreasing, and the degree of interference with the U.S. economy is gradually weakening

2. U.S. fiscal revenue has improved. At this stage, the U.S. has entered a trade agreement period, referencing the additional 25% tariff on British car imports to the U.S. being reduced to a maximum of 10%, as well as the new tariffs on China being reduced to 10% after April 2. This indicates that 10% is Trump's benchmark tariff "bottom line," which is difficult to exempt. This also shows that Trump hopes to start from tariff revenue to promote "cost reduction and efficiency improvement," thereby improving the U.S. fiscal deficit. Since the reciprocal tariffs on April 2, U.S. tariff revenue has accumulated to $13.5 billion. Even if the remaining time sees the U.S. impose a general 10% tariff globally, it will add nearly $35 billion more. Based on 2024, considering only the increase in tariffs, the U.S. fiscal deficit rate is expected to decrease from 6.2% to 5.9% this year.

3. The Federal Reserve's interest rate cut is approaching. Although the current hard data of the U.S. economy remains resilient, the threshold for interest rate cuts by the Federal Reserve has increased in the first half of the year. However, considering that U.S. prices may not rise significantly again, the probability of an interest rate cut in Q2 remains. We believe that this round of preemptive interest rate cuts is not about lowering rates, which would weaken the dollar, but rather providing nourishment to the U.S. economy, allowing dollar assets to regain attractiveness. Therefore, once the interest rate is cut, dollar assets will strengthen, and the attractiveness of gold will further weaken.

Third, central bank gold purchases are one reason for rising gold prices, but there are also risks. After 2008, global gold reserves have continued to grow, with emerging markets becoming the main force in gold purchases, diversifying asset allocation to reduce the impact of dollar asset volatility, but gold has not continued to rise as a result, with a continuous bull market.

In addition, the proportion of gold in international reserves has increased, presenting risks. Directly, if gold prices fall, it will also affect the book value of foreign exchange reserves. Indirectly, if central banks purchase gold with dollars and other foreign currencies without sufficient offsetting, it will lead to a decrease in the money supply, which is detrimental to the economy in a deflationary environment. Therefore, central bank gold purchases cannot be the reason for the continuous rise in gold prices.

Author of this article: Soochow Overseas Strategy Team, Source: Chen Li lichen, Original title: "The Dollar Hindering Gold's Rise"

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