Gold gives it best Over 5 weeks

Both gold and silver prices have spiked dramatically higher over the last two weeks and accelerated their upward momentum over the last two days as per the gold dealers in Mumbai. Gold and silver prices have moved to new multiweek highs in response to two major events that have confirmed what the American public has been acutely aware of for some time. Firstly,

Recession- The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one. Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress. Amid great challenges and strife, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geoeconomics fragmentation.

These latest reports indicate that the Federal Reserve's aggressive rate hikes have been ineffective in reducing “headline” and core inflation. Recent rate hikes by the Federal Reserve have taken the Fed funds rate from near zero to 2.25% leading to only one major accomplishment if you can call it that. They have effectively contracted the U.S. economy for the last two consecutive quarters.

It is emphatically clear that the United States economy has met the definition of a recession regardless of what the government wants us to believe. Therefore, yesterday and today's extremely robust move in both gold and silver were highly warranted and long overdue. 

Interest rate hike- after Fed is done with consecutive hikes of 0.75%, the markets now await PPE data which, for the month of July, is expected to be +0.5%. with US advance GDP data. There was a late rally in US markets which otherwise were flat during Friday. Gold emerged to be a winner after Fed Powell’s first word. These are the significant time for traders to capture unusual profits.

The US Federal Reserve on Wednesday raised interest rates by 75 basis points to 2.25-2.5% as markets expected. Fed Chair Jerome Powell sounded less hawkish in his press conference, saying the final rate hike decision at the September meeting will be determined by the incoming economic data

The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize.

Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year.

Dollar creates a strong impact worldover

In the past year, we have seen the dollar strengthening massively. The US dollar has been on a major surge against leading global currencies. Recently the dollar hit levels that it had not seen in the past 20 years. It has gained 15 % against the British Pound, 16% against the Euro, and 23% against the Japanese Yen.

The dollar is the world's reserve currency, which means it is used in most international transactions. As a result, any change in its value has a significant impact on the entire global economy.

In such volatile markets, 3 main questions that come to our mind are-

Why has the dollar strengthened?

What impact is it creating?

What next?

Answering the first question- Well there are two main reasons- Economic and Geopolitical-:

ECONOMIC- The Central bank of the US- The Federal Reserve- has been hiking interest rates aggressively and also reserving its policy of creating money by Quantitative Easing (QE). This is to curb inflation caused by Covid supply issues, the war in Ukraine, and QE. The stronger US dollar is a side effect of these higher interest rates. Because the dollar now offers a higher yield when deposited in a US bank, it encourages foreign investors to sell their local currency and buy US dollars.

Geopolitical (Dollar Parity)- the other reason for the surging US dollar is because it is a classic haven when the world is worried about a recession- and the current geopolitical situation is arguably making it still more appealing. The Euro has suffered from the European Union's proximity to the war in Ukraine, its exposure to Russian energy, and the prospect of another Eurozone crisis. It is close to dollar parity for the first time since its early years.

IMPACT?

A rising US dollar will have the following impact

1. High Inflation- Petrol and most commodities are usually traded in US dollars. So, these items tend to get expensive in the local markets as they are priced against the dollar.
2. The threat faced by low-income countries- Many developing countries owe their debts in US dollars, hence the amount they owe now is much more.
3. Bigger US trade deficit- Since goods priced in the US dollar will get expensive, other countries won’t buy them resulting in a bigger trade deficit for the US economy,
4. Fears in the Euro Zone- the strong US dollar is creating pressure on the European central banks to raise their interest rates to prop up and subdue the cost of imports including energy, thus putting more pressure on the Eurozone.
5. Breaking Precious Metals and Equities market- Furious mega rise in USD at 22 years high at 108.3. the single reason that global equities and metals are under stress despite -20% to even -35% deep cuts. Already seen in just six months.-NASDAQ slipped more than 2% on Monday, 11th July with DOW and DAX remaining weak. Gold and silver started breaking Monday’s low and they may exhibit more weakness causing the largest bullion dealers in India to face the consequence as the dollar surge continues.

WHAT NEXT

Strength in the dollar makes greenback-priced gold by some of the largest bullion dealers in India, more expensive for buyers holding other currencies. It is difficult to predict the future direction of the US dollar especially when there are so many moving parts in the world economy.

Looking forward, fears of an economic slowdown appear crucial support, and hence chatters surrounding the same will be important to track ahead of important data releases from the US.