Dollar In "Crisis Zone," Gold Investors To Profit - CrossBorder Capital
(Kitco News) - Goldis likely to be bolstered by a falling U.S. dollar,which is under pressure despite rising bond yields, according to a U.K.-basedresearch firm.
Gold rallied Monday in part because of a weakened U.S.dollar. June gold futures settled the day at $1,346.9, up 1.5% on the day.
In a recent report, analysts at CrossBorder Capital saidthat a growing U.S. government deficit is likely to require funding byadditional Treasury new issuance, driving bond yields higher. But counterintuitively, they expect that this will weigh on the U.S. dollar.
“[New bond issuances]can only add further upward pressure on yields across the U.S. curve. It is not U.S. dollar bullish because foreign demandfor U.S. ‘safe’ assets is falling,” the report said.
While rising interest rates are typically bullish for thedollar, the report said that the world’s largest reserve currency is in aprecarious position that makes it immune to rising rates, in what CrossBorderCapital calls the “Crisis Zone.”
The report likens the dollar’s current behavior to the“Carter Dollar” of the late-1970s during which “despite interest ratedifferentials widening in its favor, the USD exchange rate continued to slump.”
Analysts noted that the U.S. dollar’s deviation fromhistorically positive correlations with rising rates can be attributed to arising term premia, which suggest that U.S. safe-haven assets are lessattractive.
“Term premia are a crucial factor in all asset valuation.They represent the excess yields required by investors to hold Treasuries abovethe expected value imputed from future policy interest rates,” the report said.
According to the research firm, term premia tend to be highwhen there is an excess supply of Treasuries, thus, President Donald Trump’sbudget deficit would see government bond issuance drive term premia up.
Additionally, the report noted that money that has beenheavily invested into U.S. safe-haven assets between the years 2012-2016 is now leaving the U.S. in favor of economic acceleration in Europe and Asia. Adiminishing overseas appetite for U.S. safe-haven assets means more headwindsfor the dollar as capital leaves the world’s largest economy.
By David LinFor Kitco News
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