Forecast: U.S. Dollar in Early Innings of Plunge, Implying Higher Gold

Six weeks into 2021, the U.S. dollar was showing signs of stability after having been crushed in 2020. But, according to one of Wall Street’s most respected international economists, the dollar’s decline will resume and accelerate this year. If accurate, the forecast would imply a substantially higher price for gold because the precious metal has a tight inverse relationship to the dollar.

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Stephen Roach, senior lecturer at Yale University and former chief economist and chairman of Morgan Stanley Asia, argues, “we are only in the third inning of a nine-inning baseball game” that will see the dollar drop 35 percent by year end. The greenback lost 12 percent of its value from March 2020 through mid-February 2021.

When the U.S. dollar declines, gold becomes more affordable to buyers in overseas markets, most importantly China and India, whose precious metals markets are the world’s largest.

The dollar will accelerate its decline, Roach predicts, as a consequence of three factors: a Federal Reserve committed to a loose monetary policy that will allow the dollar to decline, a rise in the euro, and an expansion in the U.S. current-account deficit.

The current account deficit, the broadest measure of trade that includes financial transactions, is at its worst level since 2008, after years of deficit spending by the Trump administration, Roach points out in a recent Bloomberg Opinion article. The U.S. has had to import massive amounts of foreign capital to support its deficit spending. This trend will likely continue with additional COVID relief funding under the Biden administration.

“With the U.S. increasingly reliant on foreign capital,” argues Roach, “and with the Fed’s open-ended quantitative easing measures creating a massive overhang of excess liquidity, the case for a sharp further weakening of the dollar looks more compelling than ever.” As the dollar declined, gold rose 18 percent from early March 2020 through late January of 2021.

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