Geopolitical tensions with Russia over Ukraine, fiscal policy and restrictions post Covid-19 and the current path of monetary policy have contributed to a stronger US dollar in 2022, asserts Omar Ayales, resource sector specialist and editor of Gold Charts R Us.
Consider to date, the US dollar index has risen 8% (even after a 10% pullback from recent highs) while the S&P 500 and the transports declined 18% and counting. Global currencies except gold have fallen way below anyone’s wildest dreams. Gold however, held its own. It’s ending the year very similar to where it started — showing resilience.
Gold’s strength is notable, particularly since resources across the board also fell sharply, as many fell double digits like Dr. Copper, which is down 11% year-to-date. US dollar strength, together with resilience in gold, suggests demand in 2022 was driven mainly by safe haven demand.
Interestingly, dollar strength overshadowed gold and most everything else largely in part due to hawkish monetary policy from the Federal Reserve and persistent inflationary pressures that have proven to be the strongest in decades.
However, more recent economic data is already showing inflation is moderating and could be set on a downward path that could eventually reach the targets set by monetary authorities. It's pushed the Federal Open Markets Committee (FOMC) to curb the path of rate hikes for the first time this year.
Moreover, guidance provided for the rest of the year is supportive of moderation in inflation, at least to the point where it gives monetary authorities the support they were looking for to shift away from the aggressive policy and guidance being used.
Policy moderation could lead to US dollar strength moderation, too, since the dollar has been moving together with interest rates this year. Strength moderation in the dollar could become a strong catalyst for gold relative to most other currencies globally, particularly since geopolitical tensions remain.
Increasing tensions in the South China Sea between U.S. and China shows potential disruptions for markets and economies could remain. The breaking up of the post-world war era global order could also give gold a new purpose as an arbiter for international settlements among global economic blocs.
Last year, I also picked gold as my top conservative investment and it has proven to be a great one, as it has fallen the least of most asset classes compared to the U.S. dollar index. But now with monetary policy moderation and ongoing global tensions, gold is poised to take the edge over the dollar once again. For conservative investors, I’m recommending Sprott Physical Gold Trust (PHYS).