We have seen gold nearing a 1 year high over the past few months. But what has supported this rally for the yellow metal?
Lately, uncertainty in many forms has played a key role. This past week’s nuclear test in North Korea shook investors, sending them fleeing to safe-haven investments such as gold. In addition, uncertainties over Congress’s ability to pass corporate tax reforms, which are being counted on to boost U.S. GDP growth, have some pundits favouring gold relative to stock-based equities.
Last Friday, the spot gold price was trading at $1,352.50/1,352.90 per oz, up $5.2 from the previous trading day’s close.
Gold prices were well-bid on Friday September 8 as weaker-than-expected US economic data and the ECB’s decision to leave interest rates unchanged, as well as continued geopolitical risks, maintained pressure on the dollar.
Let’s take c closer look at all the influencers-
US Dollar- Uncertainty and lower-than-expected inflation rates have been doing a number on the U.S. dollar. In recent weeks, the dollar hit multiyear lows against the euro and at least one-year lows against a handful of other major currencies.
In recent months the dollar has suffered from multiple issues forcing it lower against other major currencies, including political failures, multiple climate-related disasters, geopolitical tensions and weak inflation in the US.
The latter, in particular, has made it more difficult for the Federal Reserve’s Federal Open Market Committee (FOMC) to justify hiking interest rates
The dollar index on Friday morning was down 0.08 to 91.45. Overnight US jobless claims surged to a two-year high because of Hurricane Harvey, which raised doubts over further US interest rate hikes in December.
The dollar and gold usually move in opposite directions, meaning the dollar’s weakness has been a green light for gold investors.
ECB Meet- ECB policymakers indicated at their meeting overnight that the European central bank was not intending to weaken the common European currency, which is expected to support euro performance in the short-term. The ECB maintained rates and upgraded its growth forecast this year by 0.3ppt to 2.2%, but maintained its 2018-19 forecasts.
Hurricane- Meanwhile gold prices jumped today morning as an earthquake off the coast of Mexico added to the hurricane damage in the Caribbean and US east coast in driving demand for the traditional safe haven.
U.S Data- The tally was the highest level for initial claims since April 18, 2015, when it was also 298,000, the government said.
Consensus expectations compiled by various news organizations called for initial claims to be around 241,000 to 242,000. The government left the prior week’s tally at the previously reported 236,000.
Gold prices rose after a Labor Department report Thursday showing that initial weekly U.S. jobless claims surged by 62,000 to a seasonally adjusted 298,000, with the government citing the impact of Hurricane Harvey.
Geopolitical tensions- Geopolitical risks also remain at front of mind, with the USA pushing hard for additional sanctions against North Korea. This kept safe-haven buying relatively strong
Persistent North Korean tensions and general US dollar weakness propelled gold $15 higher to new 2017 highs overnight, touching $1,249.98 and closing just below at $1,249.50.
Geopolitical events have boosted precious metals prices. Gold prices continue to push higher, underpinned by geopolitical concerns over North Korea. For any further escalation in the on-going tensions, gold is likely to remain in demand.
FOMC Meet and Interest Rate Hike- A combination of stubbornly low core inflation and rising doubts about the Trump administration’s ability to pass new legislation has been underpinning the situation.
Specifically, the failure of high asset prices and strong labour market growth to pass through into underlying inflation is bringing into question how much further the FOMC will be able to lift rates in the near term. While the healthcare bill fiasco and lack of detail around both tax reform and infrastructure spending have underlined the difficulty of turning rhetoric into reality when it comes to shifting growth onto a higher structural path. In consequence, markets have been remarkably sanguine about the FOMC’s anticipated announcement of balance sheet reduction at their September 20th meeting and are now only pricing 25% chance of another hike by year-end.
Prices are closing in on last year’s highs so some nervous profit-taking may emerge, leading to choppy trading, but the combination of North Korea, a weak dollar and low treasury yields are all supportive. Silver and platinum may well follow gold, but palladium prices that are already elevated, may struggle more.
Although this combination of factors clearly presents a constructive cyclical backdrop for gold prices, the extent of the recent rally has surpassed what can be explained by just US rates and the weak dollar.