2017 “Wild Card” Will Send Gold Soaring

Written by Jason Simpkins
Posted November 25, 2016

If you’re looking for the big contrarian play of 2017, look no further than the dollar.

Conventional wisdom says the dollar will strengthen as the Fed raises rates and central banks elsewhere around the world keep their respective currencies down.

But that may not be the case.

More and more analysts are now arguing that we could in fact see the opposite.

That’s the camp I’ve been in for the past few months. And Jim Paulsen, chief investment strategist of Wells Capital Management, is the latest to join.

Speaking to CNBC, he called the dollar "the big wild card in 2017."

"I think the dollar's going to go down, not up," Paulsen said. "There [have] been five major increases in the funds rates since the 1970s, and every one of them, when the Fed raised rates, the dollar came down."

Take a look at the last two monetary tightening periods — in February 1994 and June 2004 — and you’ll see Paulsen is right.

In both those cases, the dollar strengthened before the first rate hike, but then weakened by around 8% in the next six months. The dollar index then remained consistently below its level on the day of the first rate hike for the next two to three years.

It’s the old “Buy on the rumor; sell on the news” canard.

More recent history bears this out, too.

Here’s a look at the dollar index over the past year...

Dollar Index 1 year 11%2F16

As you can see, the dollar actually lost value following the Fed’s December rate hike. And it didn’t rebuild its momentum until just a few months ago, when traders began to anticipate the second rate increase.

There are a couple of reasons for this phenomenon.

First, the divergence of monetary policies between the U.S. and other major economies has already been priced into the market. By the time the Fed actually raises rates, the market will already be anticipating the next move back down.

Secondly, it’s important to remember that monetary policy is not the only determinant of exchange rates. Trade deficits and surpluses, government spending, growth, and inflation also matter. And perhaps most importantly of all, we must consider the role of other foreign currencies.

After all, the dollar doesn’t rise and fall in a vacuum. It’s measured against competing currencies like the pound sterling, yen, euro, and yuan. By and large, these currencies have been beaten down over the past few years. But now, as with the dollar, all of the stimulus measures enacted by overseas central banks over the past year have been fully priced in.

At this point, we’re now likely to see resurgent growth in Europe and Asia, and stagnating growth in the United States. That, along with big government spending plans in the United States, will flip the playing field, putting the dollar on the defensive.

Now, if that is indeed the case, then there are a few ways investors can play the move.

How to Profit if the Dollar Dives

Paulsen believes the weak dollar trend will boost international returns in the coming year, with global stocks making a comeback.

"I think those markets are under-owned, they've underperformed for several years,” he says. “They're better relative values. They have younger earnings cycles than the more mature cycle in the United States. They're going to have longer policy support than the United States will."

Investors could also buy gold.

Gold prices rallied some 25% in the first half of the year, as the ineffective nature of the Fed’s tiny rate hike set in. We could easily see a similar rebound in 2017.

I recently spoke with Gerardo Del Real, publisher of Resource Stock Digest Premium.

He accurately called gold’s retrenchment in the second half of this year. He thinks the dollar will continue to strengthen in the short term, taking gold as low as $1,050 per ounce.

As he wrote Monday:

I’ve repeatedly warned that a stronger dollar would impact precious metals prices in the last quarter of 2016 — and possibly the first quarter of 2017 — and would provide excellent entry points into the best juniors.

I believe we are in the middle of that correction. I believe the dollar continues higher for several months and I believe the correction in gold and silver prices continues.

And after that correction runs its course?

“A 2017 high in the $1,400-$1,500 range would not surprise me,” he told me privately.

Many investment banks have come to this realization, as well. UBS, for example, now sees gold prices climbing to $1,350 per ounce over the next year. And again, that's after what the bank believes will be a brief retrenchment in December when the Fed is widely expected to raise rates.

At the very least, one shouldn’t go into the new year believing a stronger dollar is a given.

Investors who do could be in for a rude awakening.

Get paid,

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Jason Simpkins

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Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page. 

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