Some in Mainstream Starting to Acknowledge Dollar Bear

Not everybody in the mainstream is bullish on the dollar and expecting rate hikes as far as the eye can see. In fact, the global head of commodities at TD securities sounds a little like Peter Schiff.

In his podcast last week, Peter said that the recent dollar strength is nothing more than upside correction in the midst of a bear market, emphasizing that the primary trend is down. He also said he thinks the Fed may be near the end of its hiking cycle.

I think the renewed optimism about the Fed hiking rates I think will soon give way to the new reality that they’re almost finished raising rates, and they’re not going to be able to raise rates nearly as much as the markets once believed.”

TD’s Bart Melek hit on very similar themes at a precious metals conference in Singapore last week and predicted gold will rebound in 2019 as the dollar weakens.

As time moves on, there’ll be less and less reasons to get into the US dollar, which will likely reverse some of the flows. We do ultimately think that as we move into 2019, the US dollar will weaken, which is a very powerful fuel for the gold complex.”

Melek projects $1,400 gold next year. And despite all of the rate-hike talk, he thinks interest rates will remain relatively low. Bloomberg summed up Melek’s thinking.

The overall interest rate environment is expected to remain low as the Federal Reserve hikes another two or three times next year before ending its tightening cycle, said Melek by phone on May 31. This, coupled with fully valued equities, geopolitical risks, and a downward trend in mine supply, will see increasing pressure to buy gold, he added.”

Nicholas Frappell, global general manager at Sydney-based ABC Bullion, agreed with Melek’s analysis. He told Bloomberg he sees some short-term headwinds for gold with temporary dollar strength, but he sees the yellow metal finishing 2018 strong.

Looking forward, the conditions for the gold market look more positive as the dollar rally becomes more stale and fiscal factors start to erode the dollar’s strength.”

Frappell also said he thought the tightening cycle may end next year.

Peter made very similar points about rate hikes during a recent podcast. He reminded listeners that even with a few more hikes, rates will remain at historically low levels.

Maybe the markets are looking for two or three rate hikes this year. But I think what people are now starting to think is that that may be it. I mean, after this year, the Fed is done hiking. And so maybe the highest the Fed gets is about 2.5% and then they’re done hiking. Now, the question that people should be asking is why? I mean, why are they stopping at 2.5%? They’ve never stopped at such a low level before.”

And that’s going to be problematic when the next recession hits. If rates are already low, how is the Fed going to “stimulate” the economy again? How will it reinflate the bubbles?

Peter has said he doesn’t think the central bank will be able to rescue the economy again. But let’s say he’s wrong and they manage to pump things back up again after the next recession. Where do interest rates go then? To 1.25%?

Because every time they do this and they blow a bigger bubble and they create more debt, the high point of where interest rates can go is going to have to be lower and lower every time. And so eventually, they’re going to be stuck at zero indefinitely. They won’t be able to raise them at all, which is obviously a non-sustainable situation.”

At some point, there will have to be a crisis that ends this downward spiraling cycle. Peter said that’s why he thinks it’s going to end now.

I think the next time the Fed has to go to that well, it’s going to be dry. The next time they try to stimulate the economy with rate cuts and quantitative easing is going to be the last because they are going to end up destroying the dollar and destroying the bond market in the process.”

The current dollar rally has pushed the price of gold down, but even the mainstream is beginning to see a weaker dollar on the horizon. That’s likely good news for gold. If you believe in buying low, this might be a good time to take a hard look at the yellow metal.

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