As the US dollar hit multi-month highs this week, it was noticeable that the corresponding lows for gold weren’t quite as severe. Indeed, at the latter end of the week, gold actually ticked up, as the dollar paused for breath after several days’ rampaging. Typically, when gold’s inverse relationship with the dollar doesn’t conform perfectly to type it’s because political risk is getting in the way.
This time though, in spite of the twists and turns of US politics, the off-on nature of the planned Korea summit, and the escalation of tensions with Iran, what seems to have mitigated the downward pressure on gold has been weakness in equities.
Since US equities are priced in dollars, dollar strength makes them more expensive and less attractive. Conversely, as it’s more touch sensitive to movements in the dollar, gold has been weakening for longer. To buyers with dollars, then, it appears momentarily cheap.
How much longer this dynamic will hold force remains an open question.
But it can’t be long. The attractiveness of gold over equities can only last so long, given the absence of any sort of yield from gold. The more pertinent question though is how long this dollar strength will last.
With the Fed looking to raise rates several times this year, there will be yield on the dollar too, where there hasn’t been any for several years. That newness may or may not add to the appeal. But either way, holding dollars suddenly makes a lot of sense.
The Fed is no longer printing billions of more new greenbacks, the US economy is roaring away and other currencies like sterling and the Euro remain hobbled by political issues. Britain’s exercise in self-harm continues as the Brexit process heads towards a conclusion, while the Eurozone itself is facing fresh uncertainty with regard to the future of Italy.
That second uncertainty might indeed feed back into the gold price if the Eurozone does face a further threat from populist Italians. If Italy starts to agitate for exit too then the future of the European Union as we currently know it must surely be in doubt.
But we are a long way from any such outcome yet, and gold bulls must surely look elsewhere for succour in the short-term.
Two potential triggers could take gold back above the US$1,300 mark, and both involved Donald Trump. As the US asserts itself under the banner of Mr Trump’s aggressive negotiating style, the risk of a full-scale trade war remains.
As a group, analysts don’t really know what to think about this prospect. Mr Trump’s policies are a bit hard to punch into spreadsheet models, much like Mr Putin’s. But the market is clearly paying attention. All it takes is one tweet from Mr Trump to the effect that trade talks with China aren’t going quite as well as hoped, and the sellers are hitting the ask button.
It’s a new way to run markets, but then it’s a new world in many ways.
The other risk of course is the potentially more destructive one of an escalation of hostilities either in the Middle East, in the Korean peninsula, or both.
That the Israelis were able to kill more than 50 Palestinians on the day the US embassy moved to Jerusalem with little more than a whine of protest from the international community is surely worthy of note. One can hardly imagine the killing of 50 civilians by the old apartheid regime in South African meeting such a muted response.
But of course these days the outrage is always contained in closed-loop bubbles – it’s there, but unless you check in with certain types of political discourse you could easily miss it.
That kind of information environment makes a certain amount of political and market instability almost inherent. Now that an educated and experienced media is no longer filtering news for the world’s investors, it’s becoming harder to work out what’s really important.
But it is important that Trump is facing off against Iran. Time will tell if his gamble pays off. But no one doubts that there are risks attached. And if anyone were looking for a reason to buy gold it’s probably here: that the Iranian gambit fails and a nuclear standoff develops between one civilian-killing regime and another.