Bears have been dominant in gold markets in recent weeks as US dollar strength has consolidated, and political risk considerations have taken a back seat. Some traders did take profits towards the end of this week, trading out and into other currencies, but gold’s strong start to 2018 is now a distant memory.
Towards the end of February it traded as high as US$1,360 an ounce, making those miners who modelled production plans at US$1,250 look like model conservatives.
Now, though, those models are starting to look less secure, as the gold price pushes down towards US$1,280, and with plenty of reason to suppose it could go lower still.
Suddenly, after years of weakness, the dollar is starting to come into its own. The US economy is booming, and the Fed is all set for a further string of interest rate rises. Suddenly it’s worth holding US dollars again, while the allure of gold, with its absence of yield, is fading.
To be sure, we’re still a long way from where we were fifteen or so years ago, when there were loud cheers across the gold mining sector as gold pulled away from its US$250 per ounce lows, and traded up past US$400.
That sort of price is unlikely to return any time soon, as the fundamental damage done to the credibility of all fiat currency by the ravages of the global financial crisis is probably irrevocable. There are cryptocurrencies as alternatives these days, of course, but global regulators are taking a dim view of those, and environmentalists will be too, soon enough, given recent reports that crypto mining is set to account for 0.5% of the world’s electricity usage soon.
So, gold’s position as the number one alternative to paper money is probably unassailable in spite of the outlying challenges, even if its conversion rate to and from US dollars will fluctuate in relation to the attractiveness of the dollar. Note that it’s not the attractiveness of gold that’s in doubt. It’s the dollar that fluctuates.
Even so, buying gold at this particular juncture is probably risky, given the downward momentum now evident in the market. Buyers coming in now would likely be taking a long-term view, or simply engaged in some old-fashioned hedging.
Because although the trend is pretty clear, there are one or two storm clouds lurking on the global horizon that could cause an abrupt change in sentiment.
Mr Trump’s brand of global politics is perhaps the key uncertainty. While he continues to preside over a booming economy at home, abroad he’s been pursuing an erratic course, upsetting key allies over the Paris climate change agreement and the Iran nuclear deal, strong-arming others with economic blackmail and the threat of tariffs, and stirring up tensions in the Middle East with his decision to move the US embassy in Israel to Jerusalem.
Mr Trump would no doubt maintain that his decisions are all part of a plan for the US to reassert its global dominance. And it may be that his policies do lead to increased influence for the US in the short term. And with interest rates rising, that scenario is likely lead to a continued weakening of the gold price, probably some way below that hallowed US$1,250 level that miners have been modelling projects with lately.
But consider a worst case scenario. The Iranians now rush hell for leather to develop nuclear weapons, while escalating their intervention in the Syrian civil war. The North Koreans change their minds about ceasing their nuclear programme, as it’s been reported this week they might.
The European Union, already made a mockery of in Paris and over Iran, refuses to bow to US pressure on trade and a full scale trade war ensues, to the serious detriment of the US economy as well as the European, given that trade balances between the two trading powers are roughly at parity.
A second string of problems could come as China ratchets up the pressure on the US navy around the disputed Spratly Islands, while reaching out to the disaffected Europeans.
How well will US sanctions against those helping Iran work if the Europeans and China decide to join forces and remake their own independent network of global trade?
At the moment, these imponderables don’t get much play at all in US domestic politics. John McCain, the conscience of the Republican Party is fighting a rearguard action against Trump-style politics, but in spite of his international experience he’s having to fight his battles closer to home.
Trump’s own ethics continue to come under pressure, and there’s continuing speculation about porn stars and Russian influence. Strangely though, this threat to the incumbent President probably represents only a minor risk to markets and economic prosperity.
Whatever he may say, Trump hasn’t been in power long enough for serious economic analysts to allow him credit for the healthy state of the US economy. And on the other hand, if he were to be impeached, international tensions may diminish too.
Under that scenario, the continued downward pressure on the gold price would likely continue. Which means that at the moment, gold bulls have only a continued Trump presidency and escalating global tensions to provide them with any succour. If you could call it that.