Will Italy exit the Eurozone? Will Spain’s government fall? Will Brexit undermine the fabric of the EU still further. All scenarios that would likely be detrimental to the global economic order, and by extension therefore, bullish for gold as the safe haven asset in the face of such uncertainty.
But that’s not how the markets actually played out this week as the integrity of the European Union was once again called into question.
Instead, the weakness of Europe lead to a flight from the Euro, and it was just a short hop from that dynamic to make buyers interested in the dollar yet again. Buying the dollar in a flight to safety isn’t a dynamic that we’ve seen in the market for some time, as US Treasury fiscal policy of weakening the dollar has mitigated against it.
But that policy is now gone and rapidly retreating in the rear view mirror. There have already been rate rises, and there will be more. That’s not altogether for the good for the US economy: exports will be more expensive in foreign markets and equities more expensive for foreign buyers in domestic markets.
But on the other hand, the purchasing power of the dollar will increase. That may be good for US consumers whose dollars could go further. And in the context of an economy and jobs market that is booming it may also be good for corporate America as earnings will rise.
And there’s another wild card to throw into the mix, because if the Eurozone looks more fragile this week than it did last week, on the US side, headline writers have once again returned to a perennial theme of the Trump presidency: trade wars and tariffs.
It’s not really clear from one week to the next where the US really stands, or if indeed there is a common policy thread that runs between the Treasury, the Presidency and the State Department.
But on top of all its other short-term woes, the European Union won’t now be granted an exemption from US steel tariffs. And, looking in the other direction, across the Pacific instead of the Atlantic, talk of a trade war with China has returned. This as the US and Chinese military machines continue to play cat and mouse around the disputed Spratly Islands, and questions remain about the viability of the proposed summit on North Korea’s nuclear programme.
All this is enough to put some sort of floor underneath the gold price for a while. At the moment the price looks rangebound around the US$1,300 mark, but every time the threat level diminishes, or uncertainty fades, the price is likely to dip a little.
And every time it does, it’s likely to recover that little bit less when the next bout of uncertainty returns because of the new environment of rising interest rates.
For the miners, it’s not all bad though. Bear in mind that most gold producers make handsome margin at US$1,300 gold, and if their mines have been properly modelled, will likely still look pretty comfortable even if US$100 or so gets shaved off the price in the next year.
After all, for all those with mines not in the US, generating income in dollars, a very strong currency, while incurring costs in a much weaker local currency can only be good for margins.
You can be sure that most gold miners will happily suffer a little bit of weakness in the gold price if they can shave a lot off costs. Those with sunk costs and no debt to repay will be felling particularly comfortable.
But of course it’s all about striking the balance. If the dollar firms too much more, or the gold price really drops away in the face of further rate rises, then miners won’t be feeling quite so relaxed.
But for now, the prospect of rate rises chipping away at gold doesn’t seem that menacing at all.