🤑 Dollars’ Value Drops, Great News for the US!

🐺 Hi pack-mates,

This is Howling Markets, the entertaining tour guide showing you all the hidden features and tricks of the financial markets’ amusement park!

Today we will be covering:

• Pros and Cons of Investing in Gold 🕵

• Dollar’s Value falls, What Does it Mean for You? 🤑

• Gold Price Jumps to its All Time High, but Now What? 🪙

• Equity and Debt Markets Weekly Update ⚖️

• And more!

Pros and Cons of Investing in Gold

Today, let's explore the merits and drawbacks of including gold in your investment portfolio. Imagine you're assembling a treasure chest of assets, and gold, often considered a safe haven, is one of the gems you can choose.

Similar to a pirate weighing the pros and cons of various treasures, investors evaluate gold based on its historical performance and unique characteristics.

Gold, like the timeless value of a treasure chest, has been a reliable hedge against market volatility and economic uncertainties. When other assets face turbulence, gold tends to retain its value, acting as a stabilizing force in your investment journey.

However, investing in gold comes with its set of challenges. Unlike assets that yield interest, gold doesn't provide continuous returns, making it less appealing for investors seeking a stable income.

Its value largely depends on market sentiment, and while it can shine brightly during uncertain times, it may lose its appeal in more stable market conditions when most assets are booming, yielding higher returns.

As you weigh the decision to include gold in your investment portfolio, consider your overall financial goals and risk tolerance. However, keep in mind that diversification should always be the first step in creating a winning investment strategy.

By blending traditional and alternative assets, you can potentially enhance the resilience of your portfolio, while still retaining considerable returns.

Dollar's Value Plummets: What it Means for You

Well, nothing impacts life as much as the good old dollar, am I right?

Then, something we should be asking is: what happens when the value of the dollar fluctuates significantly? And why does it change in the first place?

The value of the dollar is measured on a floating basis with respect to a basket of seven other currencies major currencies from around the world, and its value is determined based on the relative strength of the domestic currency with respect to the others which are present in the same basket.

This financial jargon can be extremely simplified by this: the exchange rates are determined based on the value of foreign currencies, measured through the interest rates.

For example, if in two countries you can purchase a bond at $100 that pays 3% in one year, keeping all other determinants constant, the exchange rate of the two countries will be 1, meaning a dollar for a euro, for example.

However, if in the US the interest rate on the same bond increases from 3% to 4% while in the European country remains the same, it becomes more desirable to hold dollars due to the higher returns, increasing the relative value of the currency.

Of course, there are other minor determinants that come into play, but interest rates always remain the most important one, especially in our current economic enviroment.

So, what happens when the exchange changes?

Well, from a financial markets point of view, a decrease in the exchange rate indicates that the interest rates on bonds and other money market assets are decreasing. In today’s economy, such change has been led by the general consensus that the Federal reserve will start  decreasing the policy rates.

A decrease in the interest rate stimulates the economy causing an increase in stocks’ prices. Additionally, a weaker dollar increases the domestic exports of the US, due to the perceived lower cost of US goods for foreign countries, increasing the productivity of the country and its GDP.

Here you can see the chart of the US Dollar Index (DXY) and its recent fall in price.

Today’s Howling Question

And now, let’s test your knowledge about gold. What is the current gold price (per troy ounce)?

a)  $1980

b)  $2080

c)   $2055

d)   $2010

e) $1920

Try to answer this question, then check the correct option and explanation after the last news!

Hint: even if you will only discover the right answer after the end of the newsletter, you will be able to find a couple of clues that might help you out in the following news about gold.

It might not be the answer, but it might help you out if you are not familiar with the topic!

Golden Opportunity: Betting on Rate Cuts

The value of gold surged, and since the beginning of October, it gained over 10% briefly reaching the all-time high set in 2020 at $2075 per troy ounce, before a short retracement.

This rapid increase in price, that started after a 7-month long downtrend, came as investors started betting that the central bank had stopped increasing interest rates for the foreseeable future.

As we briefly mentioned before, such a pause in the increase in the interest rates (and a potential decrease) are a bad sign for the dollar’s strength, but also a pretty good one for the economy.

The recent decrease in the value of the dollar’s exchange rates contributed quite significantly to providing a discount on the gold’s price (set in dollars) to foreigners.

Additionally, due to the highly inflationary period in which we have been livening in for the last couple of years, gold mining companies have struggled to keep up with the increasing gold demand of gold, which has instead been increasing due to the continuous gold purchase carried out by central banks all around the world.

All these factors have been working together to push gold’s price higher, but now that it has reached the ceiling where will it go?

Equity and Debt Markets Update

As we previously talked about in last week’s newsletter, stock prices continued to hit a strong resistance level throughout the week, and since their prices are currently overextended, stocks haven’t had an easy time trying to break out.

Stocks cannot seem to be unanimously deciding their next move and are continuing to alternate a green candle and a red candle.

Likewise, bonds too have struggled to gain traction through the week, starting out with three strong bearish days, going down more than 1.5% each trading day. On Thursday, however, the interest rates on 10 year government bonds registered an increase of almost 2%, potentially anticipating a drop in stocks’ prices that could begin next week.

Answer

The correct Answer is c) $2055.

As we can see from the chart below, gold’s price surged reaching its all time high set in 2020, as it already did both at the beginning of 2022 and 2023. Will gold break out or will it go back down as it previously did?

Howl-Worthy Memes

🐺 See you next time!

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