Gold is wildly undervalued if IMF is right that the dollar is overvalued by 10-20%
When issuing its regular crow-eating prognosis on U.S. growth, in which it was once again forced to downgrade its GDP forecast, the International Monetary Fund issued a stunning statement: The dollar is overvalued.
Like the Federal Reserve, the IMF has been perennially wrong in setting targets for U.S. GDP. Its latest revision found the agency reducing its 2016 forecast from the 2.4% it set in April to now 2.2%.
In analyzing the U.S. economy, it added: At todays level of the real effective exchange rate, the current account deficit is expected to rise above 4% of GDP by 2020, pointing to the U.S. dollar being overvalued by 10-20%.
IMF chief Christine Lagarde added later that the dollars strength is a factor ofprobably offlight tosafety, the safe-haven factor that always applies tothe U.S. dollar intimes ofuncertainty, and certainly the variation inthe price ofoil is often correlated withan appreciation ofthe dollar when the price ofthe barrel goes down.
Gold is the inverse of the dollar: If the U.S. dollar is overvalued by 10% to 20%, does that mean that the gold price which traditionally trades inversely to the greenback is undervalued by 10% to 20%?
After all, as author and investment strategist James Rickards, among others, has noted, gold is a constant, not the dollar. The dollar price of gold is just the inverse of the dollar, so weak dollar, higher dollar price for gold; strong dollar, lower dollar price for gold, he said. So all you have to say if you want to know what gold is going to do in dollars is ask yourself whats going to happen to the dollar? Its going to go a lot lower, and so the dollar price of gold is going to go a lot higher. Thats the trend for the next, say, six months to a year. The Feds got to ease up; theres no way theyre going to raise (interest rates) at least for the rest of the year.
Overshoot inflation goal, Fed told: If the IMF was looking for a weaker dollar, the prescription it gave the U.S. certainly contains the seeds for that outcome. Commenting on the Feds newfound low-rates-for-longer stance, its economists wrote, At this point in the cycle, there is a clear case to proceed along a very gradual upward path for the fed funds rate.
In fact, it urged the Fed to overshoot its inflation target of 2% in order to jolt the U.S. economy out of its doldrums. Given the likelihood and severity of downside risks to inflation, the potential for a drift down in inflation expectations, the Feds dual mandate of maximum employment and price stability, and the asymmetries posed by the effective lower bound, the path for policy rates should accept some modest, temporary overshooting of the Feds inflation goal to allow inflation to approach the Feds 2% medium-term target from above, it wrote. Doing so will provide valuable insurance against the risks of disinflation, policy reversal, and ending back at a zero fed funds rate.
If the Fed is even halfway listening to the IMF on the dollar and low rates, then gold investors have a lot to look forward to.