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Gold: Between Rate Hike Speculation & Geopolitical Escalation

Commentaries & Views

Despite the Dow Jones Industrial Average continuing to spiral, supported by upbeat global macroeconomic indicators, the promise of tax reforms and earnings coming in ahead of expectations, gold has managed to stand its ground relatively well by historical standards.

It’s not just the Dow that’s hit record levels, with the DAX breaking through 13,000 and the FTSE100 also hitting 7,500 levels, while the Nikkei sits at multi-decade highs.

So, what’s preventing gold from falling through the roof to sub-$1,000 levels?

While market risk appetite is certainly prevalent as reflected within the global equity markets, there remains an undercurrent of risk aversion, stemming from a buildup of geopolitical risks, which is unlikely to subside anytime soon and is, in fact, capable of becoming more than just a risk, but an eventuality.

The ongoing tension between the U.S and North Korea is currently the biggest threat to global peace, particularly when considering the warning issued by the Chinese government on any first moves against the North Koreans. A game is afoot and the markets are all too aware of Trump’s ability to get it wrong.

Added to the concerns over North Korea, is the Middle East and the prospects of Congress deciding to issue fresh sanctions on Iran, which could see the Iranians begin to wield their more powerful wand within the region and then there is the rise of populist governments, as seen across Europe in particular.

In the U.S, with the investigations into the U.S administration’s collusion with the Russians during last year’s Presidential Election Campaign, the possibility of an impeachment also remains, whilst no longer headline news.

At times, the dizzy heights of the global equity markets feel more like a glass ceiling and there are multiple ways in which a collapse could be instigated, including an inability by the U.S administration to successfully roll out the much talked tax reforms.

On the negative side for gold has been the continued speculation over monetary policy and that of the FED in particular, with gold tending to struggle during periods of rising rates and appreciation in the U.S Dollar.

For now, inflationary pressures are considered to be on the softer side in the U.S and beyond, which does temper the FED’s outlook on rates providing some support for gold, though should inflationary pressures begin to build, gold depreciation is expected to come.

Furthermore, the positives for gold outweigh the negatives, though a continuation of the current bull-run and increased hopes of tax reforms being rolled out may test even the most hardened gold investor.

Still, Gold is the Number One Safe-Haven Asset

Investors are creatures of habit and gold continues to be the go-to trade in moments of crisis, whether geopolitical or financial. Gold’s attention is not just on the futures markets, but also physical, the principal being that gold will always have a value for trade should the global financial markets collapse or worse yet, war break out.

There has been much debate in recent months over whether Bitcoin has dethroned gold to become the safe haven play for the markets. We have heard the cryptocurrency world begin to label cryptocurrencies as digital gold and this has certainly contributed to the debate.

Looking at the direction of gold and Bitcoin through the last few months, one could certainly suggest that buying Bitcoin has taken over the safe haven mantel, when considering the current uncertainty in the markets, with geopolitical risk being a significant issue for the markets to consider.

Over 12-months, spot gold prices has gained just 0.21% versus the Dow’s 28.64% and Bitcoin’s 716% over the same period.

Such has been the meteoric rise in Bitcoin price that few can argue or even consider whether Bitcoin has, in fact, become the new safe haven of choice. The effects of any risk on and risk off events continue to be clouded by the continued rise in demand and until the exponential gains cease, markets ability to truly gauge whether the demand for Bitcoin is a risk on or risk off will be a difficult one to assess. After all, one could argue that the performance of Bitcoin and cryptocurrencies are more aligned with the global equity markets than with gold.

The principle of holding a physical asset that has a tradable value recognized across the world certainly suggests that gold will likely retain its status as the safe haven of choice and one does question whether the alternatives would be able to stand their ground in a moment of crisis. For Bitcoin and other cryptocurrencies, the fact that not only is Bitcoin virtual, but also unregulated suggests that investors are likely to dump their coins as they are their equity portfolios, which would also be of little value in a crisis.

For now, with the significant risks that linger today, including the threat from North Korea, we will expect gold to continue to hover at around current levels, with geopolitical risk unlikely to subside anytime soon. A gold rush, however, does seem less likely, barring a nuclear missile launch by the North Koreans or a Trump impeachment as growth policies out of the U.S and a continued move by the FED and other central banks towards monetary policy normalization amidst a relatively benign interest rate environment a hindrance to consider.

It could all change tomorrow and any risk event will not only support demand for gold, but also the Yen and other funding currencies including the EUR, though for now at least we would expect that gold will remain at the helm.

For Bitcoin to take over, it would need to at least be recognized by central banks and governments the world over, and the markets to be convinced that it’s not a bubble…

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.