Gold Price Bounces As US Dollar Shows Concern For Growing US Deficits

New York (Feb 13)  The gold market is regaining some lost ground Tuesday, benefiting from a weaker U.S. dollar as markets continue to digest President Donald Trump’s proposed budget for 2019.

April gold futures last traded at $1,331 an ounce, up 0.35% on the day. The gains come as the U.S. Dollar index has dropped below the critical psychological level of 90 points. The USD Index last traded at 89.65 points, down 0.50% on the day.

Gold prices could have room to move higher in the near-term as some currency analysts adjust their expectations on the greenback. On Tuesday, currency analysts at RBC Capital Markets said they were exiting their short-term bullish U.S. dollar trade.

“On February 2 we recommended a tactical long position in the DXY,” the analysts said. “As recent evidence suggests that the short-term recovery that we were expecting is showing a loss of momentum before reaching our ultimate target at 91.00, we elect to close out our long position at 90.16 for a profit of 1.1%.”

Currency analysts at TD Securities said that they see the potential for further U.S. dollar weakness as markets digest the budget released by the Trump Administration, which proposes to spend $4.4 trillion over 10 years. While Trump’s budget has attracted market attention, political pundits have said that it is unlikely Congress will use this spending template.

Trump's budget comes after the he proposed an infrastructure spending bill that would cost $1.5 trillion over 10-years. The increase in spending also comes after Congress passed historic tax reform and cuts that is predicted to reduce government revenues by $1.5 trillion over 10-years.

“The re-emergence of the twin deficit should send shivers down the dollar's spine. The IMF has shown a 1% rise in the budget deficit is worth about a 0.6% increase in the current account deficit, suggesting a twin deficit in excess of 7% of GDP by the end of the decade,” TD said in the report. “Those numbers do not bode well for the greenback in the medium-term.”

However, not all analysts are optimistic that gold can regain its long-term uptrend.

“While Dollar weakness could in the short term offer the yellow metal further support, gains are likely to be limited by rising expectations of higher US interest rates,” said Lukman Otunuga, research analyst at FXTM.

Technically, Otunuga said that gold has to push above $1,334 an ounce to regain its lost momentum.

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