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 decisionout of the way, geopolitical uncertainty and the threat of a global trade warwill 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 hikesthis year, but tit-for-tat tariffs threats between China and the U.S. hascreated safe-haven for the yellow metal.
Up more than $30 this week, the market is seeing its bestweekly gains in nearly two years. April gold futures last traded at $1,348.80an ounce, up 2.78% from the previous week.
Despite gold’s strong performance, silver prices continue tolag 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 previousweek. This week saw the gold/silver ratio hit a new multi-year high at 81.50points; the ratio’s historical average is between 50 and 60 points.
Although still positive on silver in the long-term, EugenWeinberg, head of research at Commerzbank, said that the white metal willcontinue to suffer as safe-haven demand dominates the marketplace.
“Silver is not the first metal that comes to mind for fundmanagers who are looking for defensive assets,” he said.
Turning back to gold, Christopher Vecchio, senior currencystrategist at DailyFX.com, who has been fundamentally bullish on the preciousmetal since the start of the year, said that a perfect storm is brewing in themarketplace that will drive prices definitively higher.
“Conditions are in place for gold to be a favorable assetfor the rest of the year,” he said. “I am looking for prices to break through$1,400 by mid-year.”
Geopolitics To DriveGold Prices
With the Federal Reserve monetary policy decision firmly inthe rearview mirror, analysts are now expecting geopolitical worries todominate investment flows in the gold market.
This past week, the Federal Reserve was more optimistic onthe U.S. economy, forecasting GDP growth of 2.7% this year with theunemployment rate dropping to 3.8%. But despite this optimism, the central bankleft its inflation forecasts unchanged for the year and said that it only seesthree rate hikes this year, unchanged from December’s estimates.
Adam Button, currency analyst at Forexlive.com, said theFederal Reserve and inflation are no longer a threat to the gold market, butinvestor sentiment is starting to shift.
“Gold is now being looked at as a geopolitical risk hedgeinstead of as a traditional inflation hedge,” he said.”
Although gold has not had an excellent track record as asafe-haven hedge, with the market giving up gains as tensions subside, Buttonsaid that risks are skewed to the upside right now.
“If tensions ease gold loses maybe $40,” he said. “But ifsomething does happen, if a trade war or real war is triggered, then gold’supside is unlimited.”
Button explained new National Security advisor John Bolton,who replaces H.R. McMaster, adds some credibility to the rhetoric coming fromPresident Donald Trump. Bolton is known for his hawkish views on North Koreaand opposition to a nuclear agreement with Iran.
President Donald Trump’s appointment of Bolton comes a weekafter Trump replaced Secretary of State Rex Tillerson with CIA Director MikePompeo, who is also seen as a policy hawk.
“The gold market has been hesitant to rally on bluster, butthis 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 AboutThe 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 thedeficit.
Friday President Trump signed Congress’ $1.3 trillionspending bill that would keep the government open until September.
“This is just another piece of the puzzle that will drivethe deficit higher, ultimately leading to a ratings downgrade,” he said.
Not only is government spending expected to increase, butthe Fed is not very confident that the economy will grow at the pace needed toreduce the deficit.
In his debut press conference following the central bank’smonetary policy meeting Wednesday, Fed chairman Jerome Powell said that it isunlikely the U.S. economy will grow 3% this year. He added that the economywould have to see significant productivity growth to meet that target set bythe Trump Administration.
“If the government’s stimulus efforts don’t push growthabove 3% then there is no reason for the fed to accelerate the pace of ratehikes that they are already doing,” said Colin Cieszynski, chief marketstrategist 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 manyinvestors are starting to ask is: what is going to be the spark that drivesgold prices above its 2016 highs and eventually above $1,400 an ounce.
Ole Hansen, head of commodity strategy said that gold justneeds to keep what it is doing. He added that higher inflation pressuresbecause of poisonous trade policies, a weaker U.S. dollar as a result ofconcern over economic growth, and lower bond yields as investors look forsafe-haven assets, all help to make gold an attractive investment.
“With everything that is happening in the world investors don’thave a lot of places to hide and I think for that reason gold will do well,” hesaid.
Cieszynski said that he needs to see gold prices pushthrough resistance at $1,360 an ounce to signal that the market has broken itsnear-term trading range.
The Final Say
Although investors will be keeping a close eye on Trump’stwitter account, important economic data will also be released next week.
The week starts off with the release of March consumerconfidence data and is then followed by the release of final fourth-quartergross domestic product data.
Markets will also receive important personal spending andincome and inflation data.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com 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.