Gold Market Sees Best Week In Two Years, Driven By Neutral Fed And Geopolitical Risks
(Kitco News) - With the Federal Reserve’s latest monetary policy decision out of the way, geopolitical uncertainty and the threat of a global trade war will drive gold prices in the near-term, according to analysts.
Not only did the Federal Reserve disappoint U.S. dollar bulls -- driving gold prices higher -- as it signaled only three rate hikes this year, but tit-for-tat tariffs threats between China and the U.S. has created safe-haven for the yellow metal.
Up more than $30 this week, the market is seeing its best weekly gains in nearly two years. April gold futures last traded at $1,348.80 an ounce, up 2.78% from the previous week.
Despite gold’s strong performance, silver prices continue to lag with the market expected to see only a modestly positive close on the week. May silver futures last traded at $16.58 an ounce, up 1.9% from the previous week. This week saw the gold/silver ratio hit a new multi-year high at 81.50 points; the ratio’s historical average is between 50 and 60 points.
Although still positive on silver in the long-term, Eugen Weinberg, head of research at Commerzbank, said that the white metal will continue to suffer as safe-haven demand dominates the marketplace.
“Silver is not the first metal that comes to mind for fund managers who are looking for defensive assets,” he said.
Turning back to gold, Christopher Vecchio, senior currency strategist at DailyFX.com, who has been fundamentally bullish on the precious metal since the start of the year, said that a perfect storm is brewing in the marketplace that will drive prices definitively higher.
“Conditions are in place for gold to be a favorable asset for the rest of the year,” he said. “I am looking for prices to break through $1,400 by mid-year.”
Geopolitics To Drive Gold Prices
With the Federal Reserve monetary policy decision firmly in the rearview mirror, analysts are now expecting geopolitical worries to dominate investment flows in the gold market.
This past week, the Federal Reserve was more optimistic on the U.S. economy, forecasting GDP growth of 2.7% this year with the unemployment rate dropping to 3.8%. But despite this optimism, the central bank left its inflation forecasts unchanged for the year and said that it only sees three rate hikes this year, unchanged from December’s estimates.
Adam Button, currency analyst at Forexlive.com, said the Federal Reserve and inflation are no longer a threat to the gold market, but investor sentiment is starting to shift.
“Gold is now being looked at as a geopolitical risk hedge instead of as a traditional inflation hedge,” he said.”
Although gold has not had an excellent track record as a safe-haven hedge, with the market giving up gains as tensions subside, Button said that risks are skewed to the upside right now.
“If tensions ease gold loses maybe $40,” he said. “But if something does happen, if a trade war or real war is triggered, then gold’s upside is unlimited.”
Button explained new National Security advisor John Bolton, who replaces H.R. McMaster, adds some credibility to the rhetoric coming from President Donald Trump. Bolton is known for his hawkish views on North Korea and opposition to a nuclear agreement with Iran.
President Donald Trump’s appointment of Bolton comes a week after Trump replaced Secretary of State Rex Tillerson with CIA Director Mike Pompeo, who is also seen as a policy hawk.
“The gold market has been hesitant to rally on bluster, but this isn’t just bluster, nominating people like Pompeo and Bolton is action,” said Button. “The market is massively underpricing the geopolitical risks.”
Don’t Forget About The Growing Government Debt
Not only does geopolitical uncertainty support gold prices, but Vecchio said that he expects to see prices benefit from a weaker U.S. dollar because the government continues to spend recklessly, driving up the deficit.
Friday President Trump signed Congress’ $1.3 trillion spending bill that would keep the government open until September.
“This is just another piece of the puzzle that will drive the deficit higher, ultimately leading to a ratings downgrade,” he said.
Not only is government spending expected to increase, but the Fed is not very confident that the economy will grow at the pace needed to reduce the deficit.
In his debut press conference following the central bank’s monetary policy meeting Wednesday, Fed chairman Jerome Powell said that it is unlikely the U.S. economy will grow 3% this year. He added that the economy would have to see significant productivity growth to meet that target set by the Trump Administration.
“If the government’s stimulus efforts don’t push growth above 3% then there is no reason for the fed to accelerate the pace of rate hikes that they are already doing,” said Colin Cieszynski, chief market strategist at SIA Wealth Management. “That is going to hurt the U.S. dollar.”
What Gets Gold Above $1,400
With new momentum in the gold market, the question many investors are starting to ask is: what is going to be the spark that drives gold prices above its 2016 highs and eventually above $1,400 an ounce.
Ole Hansen, head of commodity strategy said that gold just needs to keep what it is doing. He added that higher inflation pressures because of poisonous trade policies, a weaker U.S. dollar as a result of concern over economic growth, and lower bond yields as investors look for safe-haven assets, all help to make gold an attractive investment.
“With everything that is happening in the world investors don’t have a lot of places to hide and I think for that reason gold will do well,” he said.
Cieszynski said that he needs to see gold prices push through resistance at $1,360 an ounce to signal that the market has broken its near-term trading range.
The Final Say
Although investors will be keeping a close eye on Trump’s twitter account, important economic data will also be released next week.
The week starts off with the release of March consumer confidence data and is then followed by the release of final fourth-quarter gross domestic product data.
Markets will also receive important personal spending and income and inflation data.