Gold steady as the dollar fights for credibility

Gold is hovering around $2,320/ounce, down from its all-time high of $2,450 on May 20th. Silver has taken a bigger hit; down 11% from its May peak.

Market sentiment for both gold and silver remains cautiously optimistic. Analysts expect the Federal Reserve to cut interest rates by 100-150 basis points (1-1.5%) in the next 18 months.

The US 10-year Treasury yield has declined by 7.4% over the last month, reflecting the anticipation of rate cuts. The expectation of falling interest rates typically boosts gold prices.

Still, the US dollar remains strong against other currencies. In fact, the US dollar index is up nearly 5% this year, meaning it has increased in value against a basket of competing currencies (the Euro, Japanese Yen, British Pound, Swiss Franc, etc.).

But how could the dollar be rising in the face of such acute fiscal problems?

The dollar fights for credibility

So far this fiscal year, the government has spent over $3.063 trillion on social benefits such as Social Security, Medicare and Medicaid, unemployment benefits, food assistance, and housing programs.

Tax revenue, which has totaled $3.287 trillion in the same period, just barely covers this spending.

But wait…what about national defense, education, transportation, infrastructure, federal law enforcement, foreign aid, veteran services, criminal justice, environment, community development, and the real kicker – interest on the national debt? To cover these expenses, we are forced to borrow and crank up the money printer.

The IMF has warned that the United States’ fiscal deficits pose “significant risks” for the global economy. Next year, fiscal deficits are expected to reach 7.1% of GDP. The average for advanced economies is 2%.

The rapid deterioration of the US government’s financial position is primarily due to the increase in interest expenses over the last few years. We foolishly acquired trillions of dollars of debt when interest rates were at historic lows. Now, to pay it back, we must borrow at higher and higher rates.

So why is the dollar holding up so well? It appears that the challenges we face here are even worse elsewhere.

It is strange to think that the US government is the most trustworthy – the most stable. What does this say about the competition?

Measuring the strength of fiat currencies against each other misses the bigger picture. Since the end of COVID-19, we have seen a rapid devaluation of all fiat currencies worldwide. We need a stable reference point – gold – to really understand what is happening. Unfortunately, the grocery bill also highlights the challenge of being on the wrong side of the money printer.

The US dollar has been described as “the best-looking horse in the glue factory.”

Historically, horses at the end of their life were shipped off to a factory where their hooves, bones, and hides were turned into glue. George Orwell fans will recall the tragic scene from Animal Farm when the power-hungry pigs betray the hardworking and loyal horse, Boxer, by selling him to a glue factory.

Need our currency face the same fate as Boxer the horse?