Kevin DeMeritt’s Take on What Changes to the Dollar’s Exchange Rate Might Mean for Precious Metal Investments

As inflation soared in 2022, the U.S. dollar grew stronger, reaching a 20-year high point last September. Its performance this year has varied, which could have a noticeable effect on physical gold asset-based investments in the coming months, according to Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital.

“Gold is priced in U.S. dollars, so changes in the exchange rate between the dollar and other currencies can have an impact on [its] price,” Kevin DeMeritt says. “When the dollar weakens, the price of gold tends to rise even more dramatically.”

If the U.S. dollar trends downward this year, gold might experience the opposite effect.

Elements That Influence the Exchange Rate

Last year, the Federal Reserve’s series of rate increases — an attempt to reduce sky-high inflation — drove borrowing costs up, making it more expensive for Americans to obtain mortgages and other loans.

Raising rates, however — which Lear Capital has called “a dollar-strong move” — can help boost the currency’s value.

In 2022, the U.S. dollar appreciated more than 12%, according to a report from J.P. Morgan Research, which indicated globally, regional influences could ultimately be catalysts for the dollar’s performance in 2023.

However, the index that measures the dollar’s vigor against South America, Europe, and other major trading partners’ currencies dropped approximately 7% between November 2022 and January of this year. 

For example, the euro and dollar reached parity, or both currencies having a 1:1 ratio, for the first time in more than two decades, in July 2022. But that gain was short-lived: In April 2023, the dollar had lost about 14% of its value against the euro, according to CNBC.
 

As of mid-June, the Nominal Broad U.S. Dollar Index showed the currency was significantly below last year’s peak levels. 

Although the dollar has risen at points, factors like inflation, as CNN noted earlier this spring, have affected its value this year.

The recent concern about the debt ceiling being reached and the U.S. potentially defaulting on its obligations likely also had an impact.

If in June, lawmakers hadn’t approved the bill to suspend the debt limit through 2025, enabling the government to borrow more funds, America’s credit rating could have faced a potential downgrade — which, according to CNN, might have caused investors to favor other currencies, dragging the dollar’s value down further.

The U.S. economy’s future will undoubtedly be a key influence on the dollar’s performance.

Meeting minutes released on July 5 of the Federal Open Market Committee’s June meeting reveal that although members opted against another rate increase while they assess the economy’s progress after 10 straight rate hikes, more hikes are indeed expected, albeit at a slower pace. 

In addition, a number of other indicators paint a mixed picture of the economy’s status. While inflation has receded somewhat, it’s still not at the 2% level the Fed is aiming for, and the labor market has remained surprisingly strong, 

The labor supply has improved, according to federal sources, with labor force participation now at its pre-pandemic level; numerous industries have continued to add jobs to meet the still-strong demand for goods and services, with a 339,000 overall jobs increase in May.

What a Weak Dollar Means for Gold

While historically there have been exceptions, gold has often had an inverse relationship to dollar strength. The weaker the dollar, according to Lear Capital, the higher gold’s price has been.

Economic conditions like inflation and the dollar’s exchange rate can affect market performance — and, in turn, factor heavily into investors’ allocation preferences, prompting some to seek out diversification options, such as gold, which has historically offered somewhat steady results.

During the turmoil the markets experienced last year, for instance — which included the S&P 500, Dow Jones Industrial Average and Nasdaq all plummeting more than 20% from their high point, entering into bear market territory — the demand for gold soared. 

Retail investors, central banks, and other parties, in fact, helped raise the annual demand for the precious metal 18%, ultimately reaching its highest level in 11 years in 2022, according to the World Gold Council.

“Gold is often seen as a pretty good hedge against inflation — and tends to rise when the purchasing power of the dollar declines,” Kevin DeMeritt says. “The last time we saw inflation rise [to recent levels], back in the ’70s, gold was up over 500%.”

With continued market fluctuations and fears of a recession, investors, according to Kevin DeMeritt, may increasingly gravitate toward portfolio options they feel could involve less risk than venues like the stock market.

“The economic uncertainty right now is going to be a big factor,” DeMeritt says. “Gold is used to diversify during recessions, market volatility, and war. When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price — we’re starting to see that more and more.”

To find out more about how gold and other physical precious metal asset investments work — and how to initiate an investment — visit learcapital.com.