…Gold ended March with it’s best performance since 2011. The safe haven asset completed a third-quarterly rise thanks to a weaker dollar, interest-rate concerns, inflation nervousness and geopolitical tensions. [That being said,] Gold’s finish for the quarter was its lowest quarterly rise in seven years but price-supporting factors present a bullish environment going forward.
The original article has been edited here for length (…) and clarity ([ ]) to provide a fast & easy read.
…The safe haven qualities of gold have brought it firmly back into the spotlight this year.
- Trump’s sabre-rattling and trade wars have done little to quell concerns that the global geopolitical and economic situation will return to a steady keel.
- Recent appointments to the White House – namely John Bolton and Mike Pompeo – have furthered exacerbated worries regarding the US President’s ‘America First’ strategy.
- The administration is also favourable of a weak dollar, which suggests that little is likely to change when it comes to the currency’s recent performance. Whilst it has ticked up recently it has not been able to break it’s longer-term downtrend. Bloomberg Intelligence’s Mike McGlone said in a recent note that the gold price may soar to $1,400 per ounce should the downtrend not reverse and the US dollar remain weak.
- The currency is also falling out of fashion. There is an ongoing shift out of the global reserve currency,
- not to mention the global equities fall for the first quarter in two years.
Gold remains unfazed by monetary policy
…Goldman Sachs analysts last week indicated that interest rates were one area of concern and would support gold prices, “Based on empirical data for the past six tightening cycles, gold has outperformed post rate hikes four times…Our commodities team believes that the dislocation between the gold prices and U.S. rates is here to stay.”
In times past one would understandably expect the gold price to react negatively to an uptick in interest rates, because the opportunity cost of holding it rather than bonds or cash increases but six rises from the FOMC since 2015 have done little to break gold’s run. This is thanks to inflation which has impacted the cost of living so much that real interest rates have actually decreased between 2015 and the end of 2017 so this could explain why the gold price has climbed.
More interestingly, however, is that since the end of 2017 real interest rates in the open market have been rising and, so too, has the price of gold. In both Q4 2017, and now Q1 2018, the gold price has climbed, as have inflation-adjusted 5-year bond yields. This is something that has not been seen since the gold price hit it’s all time high of nearly $2,000/oz. Perhaps [it is] another sign that the great global economic recovery we all keep hearing about is not quite as present as politicians would like us to believe.
Markets are also struggling to reconcile the disparities between the Fed’s and other central banks’ monetary policies. The FOMC is clearly in the latter stages of its rate-hike plans, yet other monetary policy committees are yet to make significant changes. This shows that the global financial system is not yet back on equal footing and we are likely to see more diversions across economies and markets…
Trade wars are still a threat
For many gold’s safe haven qualities may have been reduced somewhat once the Trump administration made some concessions for various countries, following the announcement of steel and aluminium tariffs. Concessions were granted to those who account for around 85% of imports. Trump, however, has left some countries waiting for their sentence which creates uncertainty in the market. It also suggests the administration is still working through various trade policies that it plans to implement this year. The EU is a major trading partner that has been told that it will have to wait to find out the charges on its own exports to the US. Officials from the monetary union have already indicated that there will be an equal and fair response to any measures taken by America when it comes to trade.
Hurdles on the horizon?
The above is a very small snapshot of factors that are providing support to the price of gold.
We have made little mention of:
- the impact of Brexit,
- the stock market, p
- eak gold
- and, of course, inflation which is now beginning to truly reveal itself.
All of these will likely play varying roles when investors are deciding on portfolio allocations and safe haven assets. The point is, wherever you turn there is a clear signal pointing upwards for the price of gold.
At present it seems there are two things that could halt gold in its immediate uptick:
- a recovery for inflation and
- a fall in stock market volatility.
The former is highly unlikely and the latter may happen in the short-term but ultimately will cause significant damage.
Once again the price of gold is indicating that there are major structural issues in the global financial and political system. They are all interlinked will little chance of one suffering without the other feeling the impact.
Investors should take advantage of the gold price now. The factors are aligning for a situation akin to the…financial crisis, which could be dangerous for those holding cash in the bank or other assets exposed to counterparty risk…
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