Gold's Price Outlook Remains Murky: Lack of Clear Catalysts

(Continued from Prior Part)

US trade deficit widens in March

The trade balance is reported monthly by the BEA (U.S. Bureau of Economic Analysis). The BEA reported the trade balance for March on May 5. The overall US trade deficit in goods and services was $51.4 billion for March—compared to 35.9 billion in February. March exports were $187.8 billion—$1.6 billion more than the exports in February. March imports were $239.2 billion—$17.1 billion higher compared to the imports in February.

The US dollar was negatively impacted by this news. The PowerShares DB US Dollar Bullish ETF (UUP) closed down 0.3% on May 5. This huge gap is most likely due to a strong dollar holding back exports, while imports surged due to the resolution of the labor dispute at West Coast ports. So, the resolution should have a one-time effect on the trade balance, which should normalize going forward.

The balance of trade

The balance of trade is the difference between a country’s monetary value of exports and imports. A positive balance is known as a “trade surplus”—exports are greater than the imports. A negative balance is known as a “trade deficit.”

The relative value of the US Dollar Index compared to other currencies is affected by changes in the balance of trade. A trade deficit means that foreign goods are in demand. This increases the demand for foreign currency, causing outflows of the dollar to increase. Over a long period, this leads to devaluation of the dollar.

The above chart shows the relationship between gold prices and the trade balance. Because trade balance values are negative, an upward-moving line means a decrease in the deficit and vice versa. Meanwhile, the trade balance and gold don’t have a linear relationship. There may be other stronger variables affecting gold prices—like the strength of the dollar.

An expanding trade deficit leads to more pressure on the dollar. As a result, it’s usually positive in the long term for gold prices and ETFs like the SPDR Gold Shares (GLD).

An expanding trade deficit is also positive for gold stocks like Goldcorp (GG), Barrick Gold (ABX), Harmony Gold Mining (HMY), Newmont Mining (NEM), and Kinross Gold (KGC). It’s also positive for ETFs that invest in these stocks like the Market Vectors Gold Miners ETF (GDX). Goldcorp, Barrick Gold, and Newmont Mining are its top holdings. They account for 20% of its total assets.

In the next part of this series, we’ll discuss the Consumer Sentiment Index reading for the US and why it’s important.

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