Gold prices have risen to the highest level since November last year as investors shift away from risky assets in the wake of geopolitical uncertainty.
Futures for the yellow metal rose to $1,303.90 per ounce, while spot gold remained just below $1,300 per ounce.
A market that was once worried about the nuclear war has now moved on a host of other factors that are creating concerns for various market players.
Let’s have a look at the various factors that created jitters in the market in the past week.
Barcelona Attacks- Heightened terror fears added to the risk off sentiment after at least 13 people died when a van plowed into pedestrians in Barcelona. The terror attack was a reminder of lingering geopolitical risks, with nerves still raw after last fortnight’s escalation of tensions on the Korean peninsula.
Investors fled into German and U.S. Treasury bonds and bought gold for the third day in a row, as the appeal of such top-notch assets grew further due to this deadly attack.
US Data- The global risk-off mood accelerated overnight on Trump “stability concerns”, coupled with fallout from the Spain terrorist attack and lingering North Korea tensions.
Data released showed that Jobless claims for the week ending Aug. 12 came in at 232,000, versus expectations of 240,000. The Philadelphia Fed Index, gauging overall manufacturing conditions, came in at 18.9 for August, compared with consensus estimates of 18.5.
Industrial production grew 0.2% on the month in July, slipping below estimates of 0.3%. Concerns that Trump’s stimulus is in peril spiked following speculation that his top economic advisor, former Goldman COO Gary Cohn, was set to resign roiled markets on Thursday until reports that he’d opted to stay on board steadied the ship, however the weak dollar and dialling back of US Federal Reserve (Fed) monetary tightening expectations has given a modest lift to the precious metals, which stood up high.
US Dollar- The dollar was pulled lower on Wednesday as traders grappled with the prospect that the Federal Reserve might not raise interest rates again this year following the release of the Fed’s July meeting minutes.
The U.S. dollar retreated against haven currencies like the Swiss franc and the Japanese yen Thursday, following a day of negative headlines.
Earlier on Thursday, the greenback was propped up by weakness in the euro EURUSD, -0.0850% following the release of dovish minutes from the European Central Bank’s last meeting. The U.S. unit also remained stable as initial jobless claims and the Philadelphia Fed Index came in better than expected, but was weaker than the prior period, while industrial-production data missed expectations.
FED comments- The metal started its rise from $1268 on Thursday afternoon after the release of Fed minutes from the July FOMC policy meeting, according to which policymakers grew increasingly concerned about the sluggish inflation numbers. Whilst also on Thursday US President Donald Trump fell out with business leaders over his response to the recent turmoil in Charlottesville.
This followed a mixed session on Thursday in which gold strengthened a little while the rest of the complex was under downward pressure in spite of a friendlier macro backdrop (i.e. lower US real rates, equity losses) due to the release of dovish US Federal Open Market Committee minutes on Wednesday and dovish Fed speech.
Geo political uncertainty- Gold’s status as a safe-haven asset has seen investor demand surge during periods of heightened risk. In recent times, however, President Trump’s combative style has seen safe-haven buying reach a sustainably high level. With tensions around North Korea and Iran rising, this is unlikely to subside any time soon.
Gold Supply- political uncertainty has been impacting investment in supply. In fact, global mine supply has fallen in 2017. According to World Bureau of Metal Statistics, gold production is down 2% y/y in the first five months of the year. Production in May alone was down 3.1% y/y. Growth in mine output is at its lowest point since the financial crisis, with risks only getting greater
Although Gold failed to break above $1300/oz today (Friday), it remains in position to do so because of its renewed strength in real terms. As long as the US$ index does not rally hard, we expect Gold to break above $1300 and reach $1375. The gold stocks as a group have been lagging recently but in the event of a Gold breakout, we foresee significant upside potential as the group could play catch up.