Gold loses its lustre to dominant US dollar
Gold, that traditional safe haven in times of stress, has just hit a two-and-ahalf-year low. At $1,179 an ounce, it has fallen more than 10pc since the start of the year and is 13pc lower than its 2018 high so far. From trade war to Brexit to emerging market wobbles it’s fair to say we live in uncertain times, so why isn’t gold doing better?
It would seem investors are not buying gold bars and stuffing them under their mattresses. They are not even buying their electronically traded equivalents. Inflows into exchange traded funded (ETFS), instruments that track the price of commodities without needing to hold the physical product, slumped 46pc in the second quarter of the year, according to the World Gold Council, pushing demand down 4pc. The first half of 2018 saw demand for the yellow metal fall to its lowest level since 2009.
Moreover, short-sellers are betting hard that the price will go lower, and profit when it does. They buy derivatives such as futures contracts and sell them with a view to buying them back cheaper at a later date. Last week, short-selling of gold futures on the Comex market hit a new record.
Gold is unlike other metals in that its price is far more closely tied to sweeping economic trends and political factors than the forces of mere supply and demand. That, for the companies that mine it, can be valuable, too: you are, after all, essentially digging pure money out of the ground.
The metal’s current woes are essentially tied to the fortunes of the dollar, which has risen strongly against most currencies through the year. Gold, like most commodities, is priced in dollars and as such becomes more expensive and less tempting when the greenback rises. Dollar strength is why emerging market currencies such as the Turkish lira and the South African rand have been pummelled this week.
Observers of the dollar don’t expect it to change any time soon. The US Federal Reserve has raised interest rates seven times since 2015, lending support to the dollar. After the most recent rise in June, markets reckon there is a 60pc chance of two further hikes this year.
But it is not quite true to say that gold has lost its lustre as a safe harbour either. At times of high geopolitical tensions it has tracked higher; last year, for example, it peaked shortly after North Korea tested a thermonuclear missile.
Rather it is more accurate to say global investors have other, better assets to park their money in. US stock markets hover near record highs and the economy is ticking along. Better to buy into American equities or Treasuries than stick money into gold, which has no yield, and so pays no interest. Noted investor Rick Rule of Sprott Global – a long-term gold bull – admitted this week: “The fight really does seem to be between the dollar and gold, and gold seems to be losing.”
That doesn’t mean gold’s story is done for this year. Stripping out the noise from ETFS, and confused investors worried about the value of holding it, physical demand for the metal from jewellery makers, industry and bullion buyers is solid. Key markets such as China and India appear sound, with the latter heading into peak buying season.
The gold price just needs a trigger to kick-start its move higher. Some market watchers wonder whether the annual meeting of central bankers at Jackson Hole in Wyoming next week will provide it. They will be looking for clues as to whether the Fed will begin tightening sooner, and tapering the pace of rate rises. Will Jerome Powell, Fed chairman and keynote speaker on Friday, give an indication that he’s aware a stronger dollar is causing pain in emerging markets so heavily dependent on dollar debts?
Powell has a critic of current Fed policy closer to home. Donald Trump has made it plain that he is “not thrilled” with continual rate rises; the president still has the mindset of a real estate developer, thinking about borrowing at low rates. Nor is he a fan of a strong dollar, believing that it enables China to get away with having a weaker currency and thus “win” at trade.
It’s possible the dollar may weaken of its own accord if the US economy hits a bump in the road – especially if Trump’s trade war on China results in rising prices at home. This in turn may force the Fed to slam the brakes on. And Trump himself could provide an impetus to the gold price by taking to Twitter and calling Kim Jong-un “little rocket man” again – or worse.
When gold does turn, it could be sharp. The extent of the aggressive short positions could lead to a “violent reversal”, according to one expert. “People who trade futures markets are trend followers. They’ve seen gold go down and it’s encouraged them to add short positions,” he says. The effect of all this jumping on the bandwagon is that it has become a self-fulfilling prophecy. For gold, it’s a case of what comes down, must go up – sooner or later.