Tag: Global Reserves

Summary

• The dollar is weakening due to capital outflows from the US
• Long-term Treasury yields are declining in anticipation of Fed rate cuts
• However, capital outflows are expected to lift long-term rates and slow economic growth in the years ahead
• The weaker dollar is expected to depress stock prices and boost demand for gold

---

The US Dollar Index broke support at 98, signaling another decline with a target of 90. Trend Index peaks below zero warn of strong selling pressure.

A low CPI print boosted support for Treasuries, with the 10-year yield declining to 4.36%.

However, the long-term chart below warns of a bond bear market. After more than three decades of capital inflows into US financial markets, international capital flows have reversed in anticipation of President Trump’s trade policies. Narrowing the trade deficit will likely slow the inflow of capital into the US, raising long-term interest rates and slowing economic growth.

The sharp increase in federal debt, from 55% of GDP in 2008 to 114% today, limits policy options. Reducing the fiscal deficit from its current 6.5% to a more sustainable 3.0% would likely cause a similar contraction in economic growth, tipping the economy into recession.

The Fed is also limited in its monetary policy options because of inflationary pressures from Trump’s trade policy, if it were to cut rates, and the adverse effect on the fiscal budget if it allowed long-term interest rates to rise.

The weakening dollar will likely accelerate the capital outflow from US financial markets, increasing the upward pressure on long-term interest rates and downward pressure on stocks. It is also expected to boost demand for gold as an alternative.

Gold climbed to above $3,400 per ounce, signaling another test of resistance at $3,500. A breakout above $3,500 would strengthen our target of $4,000 by the end of the year.

According to the IMF, the percentage of gold in international reserves increased by a record 4.0% in 2024, with a similar decline in US Dollar holdings. However, official gold purchases are only half the picture.

Jan Nieuwenhuijs conducted extensive research, along with the World Gold Council, on unofficial gold purchases by China and Saudi Arabia. He estimates that this back-door gold accumulation amounts to 3,500 tonnes since 2010, in addition to the 5,500 tonnes of official purchases.

The S&P 500 is headed for a test of its previous high at 6100, but a weakening dollar disguises its true performance. When measured against gold, the index has declined more than 20% in real terms over the past 12 months.

Conclusion

The weakening dollar warns of capital outflows from US financial markets. A narrowing of the trade deficit is expected to reverse the three-decade-long bull market in bonds, lifting long-term interest rates and reducing growth.

The move is bearish for stocks in the long term, with expected higher interest rates and lower earnings growth. However, contracting growth will likely reduce interest rates next year as the Fed loosens monetary policy to stimulate growth. Both long and short-term scenarios are bearish for stocks.

Gold will likely be boosted by a weakening dollar and increased central bank buying as US dollar reserves are replaced with bullion. A breakout above resistance at $3,500 per ounce would strengthen our target of $4,000 by the end of the year, but the long-term outlook remains bullish.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• Jan Nieuwenhuijs: Secret Gold Purchases by Chinese Central Bank Reach Mainstream Media