The Impact of U.S. Tightening Policy on Gold Prices, Dollar Index, and Cryptocurrencies – Does History Always Repeat Itself?

With the end of the COVID-19 pandemic, many countries, including the U.S., entered a phase of implementing tightening policies, ending the golden era of riskier markets like cryptocurrencies.

Ransom in the New York Style

You’ve probably heard the phrase “history repeats itself.” Many experts believe that price cycles in financial markets are recurring patterns that, by carefully studying past cycles, can predict the future of financial markets with relative ease. As you may know, fundamental factors are the primary determinants of prices in any market, and technical analysis is, in a way, entirely dependent on these fundamental factors. In this article, we aim to examine the price trends of financial markets from a different angle—a more logical, realistic perspective that moves beyond traditional and technical frameworks. This is because each fundamental factor can dictate the fate of a market, easily refuting the “magic” of price prediction through technical analysis.

The emergence of blockchain technology has created a new financial market that is always open, without borders, and decentralized. Innovative and practical ideas in this industry have attracted small and large investments, officially transforming the cryptocurrency market into a branch of the global financial system. Although this market is young and inexperienced, it has already experienced seemingly recurring fluctuations in its 15 years, indicating that the emotions governing the market, supply and demand, greed, and particularly the challenging global economic cycle all follow a logic that drives the ups and downs of this market.

Supply and Demand, But at What Price?

In simple terms, supply and demand examine the effect of price on quantity in a competitive market. Price affects demand from consumers and supply from producers or service providers. As a result, the economy reaches equilibrium at a specific price and quantity where supply and demand intersect.

However, our focus is on creating demand. How can a producer create demand for their products?

• Advertising
• Creating Demand

A traditional model involves business owners allocating costs for advertising to increase demand for their products and services.

The second model is different. Demand is created using more intelligent and often more expensive methods. A provider may offer special incentives to generate demand for their market.

This model is a double-edged sword, requiring professional planning and goal-setting. If the plan fails, the provider risks losing the market and demand.

The market here refers to international financial markets. When countries face economic tensions and challenges, they must assess various factors—such as exports, imports, production, employment, and resources—while monitoring competitors to strike a balance between controlling inflation and stimulating economic growth.

Ransom in the American Style

The contrast between Leonardo DiCaprio’s desperate fighting in Gangs of New York to survive and his bluffing and deception in The Wolf of Wall Street reminds us of the evolving strategies of American policymakers in financial matters. Ruthless, destructive actions, coupled with cunning and strategic bribery, are all part of their clear approach to controlling a nation’s economy and even aiming to dominate the global economy.

With the deepening of the global economic recession, the U.S. Federal Reserve’s approach to controlling inflation becomes more hawkish. “Hawkish” refers to tight monetary policies aimed at controlling inflation, such as raising interest rates to reduce liquidity and increase the value of the national currency.

This model encourages dollar holders to save their dollars, reducing the desire to take out business loans. This leads to lower demand in the market and slows the circulation of money, ultimately reducing the rate of price increases, increasing demand for the dollar, and controlling inflation. As earning interest on bank deposits is considered a safe income, more individuals and organizations will prefer to return their dollars to American banks, directly impacting production rates and economic growth.

Raising or lowering interest rates is a double-edged sword that must be carefully analyzed for its positive and negative impacts. While lowering interest rates can reduce the cost of goods and services, leading to increased investment and production and ultimately controlling inflation, tight monetary policies have a quicker impact in controlling inflation during financial crises.

If miscalculated or poorly executed, such policies can negatively affect a country’s economy. The first negative effect is reduced production and the central bank’s balance through the sale of bonds and U.S. Treasury securities. Therefore, in the long term, raising interest rates can significantly harm economic growth and cannot be sustained indefinitely.

What is certain is that this trend will eventually come to a halt, and the U.S. financial policy train will one day reverse along the same path it took. Knowing this and understanding global financial and economic policy orientations will provide a more comprehensive and logical perspective for making individual decisions.

The Impact of Contractionary and Expansionary Policies on Gold Prices

Investors are always searching for the safest platform to preserve the value of their assets. The severe economic blow dealt by the COVID-19 pandemic brought valuable economic lessons. After businesses shut down due to the pandemic, many investments flowed into non-currency, high-risk assets like financial markets and cryptocurrency. This led to decreased demand for the dollar and increased demand for gold, cryptocurrencies, stocks, and other assets.

The dollar index entered a downward trend during this period, while gold and Bitcoin surged. As the pandemic subsided, countries began rebuilding the shattered global economy. The U.S. and many other nations entered a phase of contractionary policies, and riskier markets like cryptocurrency reached the end of their golden period, entering a decline.

Up to this point, everything seemed to be following previous market fluctuations. Expansionary and contractionary policies and normal market volatility were in play. However, in early 2022, the U.S. decided to raise interest rates again. The highest U.S. Federal Reserve interest rate from 2009 to 2021 had been below 2.5%, and for most of that period, it hovered near zero.

From mid-2022, the interest rate hikes continued unabated. A year into this contractionary policy, while many predicted the end of interest rate increases, the rate crossed 5% in May 2023, causing a global surge in demand for the dollar.

This wasn’t the end of the story. Jerome Powell, Chair of the U.S. Federal Reserve, consistently emphasized the continuation of America’s contractionary policies in his speeches and conferences, putting an end to the idea that history always repeats itself in financial markets.

One of the unusual events during this time was the drop in global gold prices from above $2,000 to around $1,800. An example of the sharp fall in gold’s price occurred between September 20 and October 6, 2023, with a seven percent decline in just two weeks.

History Doesn’t Always Repeat Itself

Following shifts in the financial policies of countries like the U.S., Australia, the UK, and the Schengen Area aimed at recovering from global economic damage, we have witnessed abnormal or, more precisely, non-repetitive trends in financial markets.

These changes have directly impacted gold, cryptocurrencies, oil, the forex market, and other financial sectors. When a country like the U.S. attempts to restore the value of its national currency, other markets lose value relative to the U.S. dollar.

But does the rise in the dollar’s value necessarily mean the decline of other markets? Or is it merely the dollar value of these markets that decreases?

This question has two aspects. First, how significant is the global importance of the exchange rate between assets and the dollar? Second, how much does a decline in dollar value affect the intrinsic value of those assets?

On one hand, global pricing is generally done in dollars, and a drop in the dollar price of an asset is often perceived as a price decrease. On the other hand, how much can proposals like removing the dollar from Asian trade between countries such as Russia, Iran, and China reduce the dollar’s dominance?

Valuing Cryptocurrencies

In the cryptocurrency market, digital currencies are initially valued against Bitcoin. For example, Ethereum’s price was first measured in ETH/BTC and then ETH/USD. This is one of the main reasons for digital currencies’ popularity: they preserve the value of assets through something with intrinsic value distinct from fiat currencies issued by central banks.

The value of cryptocurrency projects is measured by various factors, including the ability to transfer value, data, and assets in a decentralized way, the implementation of decentralized applications (Dapps), limited supply, and the practical applications of their blockchain projects.

The unprecedented interest rate hikes by major global banks and the diminishing dominance of the dollar in global markets indicate trends that differ from the past. In other words, history will repeat itself as long as financial policymaking and global economic changes remain repetitive and predictable—meaning, never.