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The Hard Assets Alliance Blog

Why a Strong Dollar Will Pass, and What That Means for Gold

It’s a frustrating time to be a precious metals investor. No matter what happens, gold can’t catch a break. The latest threat to gold: a strong dollar.

Last quarter, the US dollar notched four-year highs and closed September with its longest streak of weekly gains since 1971, or when the Bretton Woods agreement severed the link between gold and the dollar.

Conventional wisdom tells us that a strong dollar is bad for gold. The logic is pretty simple: gold is priced in dollars, meaning it becomes more expensive for foreign investors to buy when the dollar appreciates.

Precious metals investors need not worry, though. A strong dollar doesn’t look like it’s here to stay.

The Best of a Bad Bunch

The dollar’s rally is somewhat perplexing. In the United States, economic recoveries typically run their course within five years. The current recovery is over six years and counting (73 months so far). And though the latest job report shows an uptick in hiring, companies still aren’t bringing on full-time workers like they used to.

With little support from the underlying economy, the dollar is surging solely because the United States is the least-rotten economy in a batch of bad apples. That perception could soon change.

In many ways, the US economy is more fragile than it was prior to the Great Recession. In fact, easy-money policies are the only reason the US economy is even treading water still.

Investors have been duped into thinking America is on the right track simply because the Federal Reserve is winding down QE. Sure, the central bank is trimming its monthly asset purchases from $85 billion to $25 billion in October, but Yellen is stopping well short of a complete exit. The Fed now plans to wait even longer than summer 2015 to lift rates.

Stop Making Sense

Once upon a time, countries sought strong currencies. It represented financial discipline and sound monetary policy. Boy, have things changed!

Currencies worldwide are locked in a race to the bottom. On one hand, Yellen wants to defend against a strong dollar to keep America competitive. However, the real reason why a strong dollar won’t last is because the economy can’t stomach a positive-rate environment.

The United States is seven years into ZIRP, and benchmark rates still haven’t been raised once. The Fed won’t even bump up the fed funds rate by a mere 100 basis points for fear of sending the markets into convulsions. The economy is so addicted to stimulus that the only recess during last week’s volatile trading session was when word got out that the Fed would be late on raising rates. It’s a scary situation when your entire recovery hinges on asset price inflation.

No Easy Way Out

The Federal Reserve is hoping to undo seven years of ultra-loose monetary policy without derailing the fragile US economy. To truly return the economy back to normal, the Fed would need to not only stop buying debt but also unload the trillions of dollars of bonds it’s added to its balance sheet since 2008.

Whether they admit it or not, the Fed knows the economy is pinned between a rock and a hard place. Investors can therefore expect a slow exit by the Fed, if not additional stimulus. In any case, a strong dollar won’t be part of the plan, and this is reason enough to own gold.

Deflation may be on the tip of every investor’s tongue, but it’s inflation that is already baked into the cake. Gold could certainly go lower in the near to medium term, but we know exactly where it’s headed in long run.

Investors with long-term horizons may want to use today’s price as a buying opportunity. At the Hard Assets Alliance, we have no doubt that gold is going to look good in your portfolio down the road.


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