By Rick Mills
As a general rule, the most successful man in life is the man who has the best information
Gold prices briefly traded above $1200 on Wednesday due to the legal and political troubles facing Donald Trump following the Paul Manafort guilty verdict on Tuesday. Kitco’s Jim Wykoff reports:
Wednesday saw some trader and investor anxiety as Trump is in some hot water. Two of his close associates are likely going to jail. This has added a bit of uncertainty to the world marketplace at mid-week. There is talk Trump could pardon those associates, or that he could be impeached. And the mid-term congressional elections are right around the corner.
Gold actually climbed for five straight sessions on US dollar weakness, giving some relief to gold bugs shell-shocked by the $1174 low hit on August 22 – the worst level since January 2017. The metal of kings on Wednesday finished above the psychologically important $1200 an ounce, with gold futures trading at $1202.90, though the spot price stayed under, at $1189.70. Gold had a mini-rally on Friday, hitting $1208 an ounce (at time of writing) on comments from Fed chair Jerome Powell that the central bank is committed to gradually, not suddenly, raising interest rates.
Unfortunately however, it doesn’t look like there’s much light at the end of gold’s tunnel which has seen an especially dark summer. Minutes from the Federal Open Market Committee held July 31 to August 1 signalled that the Federal Reserve is likely to raise interest rates next month due to what it deems solid economic growth.
Rates have already been hiked twice this year, and have steadily been increasing since the end of quantitative easing in 2015. Higher rates, or even the expectation of, usually put pressure on gold prices, since gold pays no yield compared to bonds or dividend-paying stocks. Hot US stock markets have only made the situation worse.
In a little over six months, gold has dropped 13.5%, compared to 2017, when the metal was up 12.5% over the year. That puts gold firmly in the grips of a correction and moving in the direction of bear market territory of losses greater than 20%.
Gold’s dip has largely been the result of a parallel climb in the US dollar due to a number of factors, including safe haven demand for US T-bills. In fact the big story line for gold these days is that it no longer appears to be the attractive flight to safety it normally is in times of economic and political turmoil – all of which is in abundance globally right now. Instead, investors are parking their money in the US dollar. But why? Is the US economy really that strong? We have our doubts. So what gives with gold and the US dollar? This article will explain the machinations of the greenback, the yellow metal, and the economic metrics that always coalesce to determine their respective values: interest rates, bond yields and inflation.
Treasury binge
What US dollar assets are being bought and by whom? It’s mostly US Treasuries. Foreign investors purchased some $26 billion of T-bills in May, driven by fear of a trade war and the indecisive result of the Italian election. They were also attracted by higher bond yields, which hit a seven-year peak in May. The two largest Treasury holders, China and Japan, both increased their buying, although Russia didn’t buy any, having cut their purchases by 50% in April – likely in reaction to new US sanctions on Russia, Reuters said. Germany bought $12 billion more in April compared to March.
Interestingly though, it’s not just central banks who are gobbling up Treasury notes. It’s also institutional and retail investors, drawn to their yields which are now competitive with the average S&P dividend yield, reports Wolf Street. It notes that over the previous year from mid-June, $1.22 trillion in new US government debt (Treasuries) was purchased, with just over $1 trillion bought by investors. Foreign holdings only increased by $109 billion over that period, while the Fed’s Treasury holdings were down by $70 billion, as the central bank sold T-bills as part of its plan to unwind quantitative easing.
Gold getting crushed
Because gold, and other commodities, is traded in US dollars, when the dollar strengthens, the value of gold will fall. When the gold price dips it also means that the dollar has jumped. Right now you can buy a lot more gold with a dollar than you could six months ago when it was trading about $100 more an ounce.
The question though, is why is the dollar so strong? Forbes gives one of the best explanations I’ve read, noting that the rally in the greenback is due to the two-pronged strategy being pursued by the Trump Administration and the Fed: a rise in short-term interest rates and a big increase in government spending, fuelled by the $1.5 trillion tax cut passed last December.
The combination of tighter monetary policy (higher rates) and a loose fiscal policy (higher spending) “could be the closest thing to an elixir for currencies. It is the policy mix that the US is pursuing,” Forbes columnist Simon Constable writes. The result has been a flood of capital to the United States, attracted by higher returns. A report from Brown Brothers Harriman, a New York bank, states that foreign investors bought $4.7 billion of US assets in the second quarter, the largest quarterly purchase in a decade. This massive inflow of cash is pushing up the value of the dollar, while at the same time, crushing gold. As Project Syndicate argues, while the Trump Administration would like Americans to believe the dollar’s rise is due to strong economic growth driven by deregulation, tax cuts and defense spending, the reality is it’s more to do with interest rate hikes.
The dollar’s rise has also fed into gold’s …read more
From:: Mining.com