LAWRIE WILLIAMS: Favourable outlook for gold – Murenbeeld
The latest Gold Monitor newsletter from Martin Murenbeeld’s consultancy in Canada makes some enlightening observations on the state of global economies and on gold which, overall, looks to be cautiously bullish for the yellow metal. As I have noted before I rate Martin’s analyses strongly as perhaps tying in quite closely with my own views on the economy and precious metals. He is perhaps more ready to discount the short term likelihood of a U.S. recession than I am, but on other factors we tend to have parallel views. In truth Martin’s assessments should probably be taken more seriously than my own as he is an economist by background whereas I a mere engineer with a pragmatic outlook rather than an academic one!
In this weekend’s Gold Monitor ( for a free trial and subscription details click on www.murenbeeld.com) Martin notes the apparent breakdown in the ongoing trade talks between the U.S. and China and the latest U.S. Fedspeak as potentially positive factors for gold. He also notes that the past week saw a cumulative inflow of funds into gold ETFs – admittedly a small one - and ends the letter with a note on the investments into gold of the hugely respected Ray Dalio’s Bridgewater Associates fund which has been implementing small increases in its holdings in the two top U.S. gold ETFs – GLD and IAU. Martin ends his commentary with the note that “His [Ray Dalio’s] worries parallel ours – trade, geopolitical, economic and financial crises dot the horizon”. This comment reflects our own views very succinctly too. It’s an economic and geopolitical minefield out there!
Martin sees the other positives for gold as including: 1) more equity market volatility; 2) more rapidly-than-expected slippage in US growth; and 3) earlier than expected Fed rate cuts. And of course, the prospect that China may continue to diversify out of Treasuries into gold (as Russia has done).
But back to specifics: On U.S. China trade talks Martin notes that a potential impasse has developed – exacerbated by the latest U.S. moves on increasing tariffs on Chinese goods and on specific moves (paralleled by some of the U.S.’s allies) aimed at making life difficult for Chinese mobile phone and tech giant Huawei. While the St. Louis Fed’s CEO, James Bullard, has made an impassioned plea for China to accept all the U.S. demands and reach a trade agreement with the U.S. for the good of its own economy, the Middle Kingdom seems unmoved with Gao Feng of the Chinese Ministry of Commerce reported as saying “The latest U.S. actions on trade [tariffs, Huawei] are preventing negotiations with Beijing from proceeding.”
Martin notes that the gradual decline in the parity of the yuan against the dollar over the past year has partly mitigated the effects of the initial tariffs on the cost of Chinese goods in the U.S., while a further decline in parity to above 7.0:1 (it’s currently 6.896:1 according to Kitco) could also allay some of the newly imposed higher tariff levels being imposed. The Gold Monitor notes that the U.S. Department of Commerce’s latest ruling that it has issued a notice of proposed rulemaking to impose countervailing duties on countries that act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports, may well be specifically aimed at the possibility of a Chinese engineered parity revaluation.
Meanwhile the U.S. Fed in its latest minutes has further allayed the fears of any interest rate increase this year. Indeed the current odds are on a possible rate cut later on this year which would provide another boost for gold.
The other big global economic grouping, the EU, will be announcing the results of trans-European polls for the membership of the new European Parliament tomorrow, It is widely expected that anti-EU parties may make significant inroads, particularly in the U,K. where polls suggest that Nigel Farage’s new Brexit Party may come out ahead of all others, primarily at the expense of the Conservatives and Labour. While this may prove to be a protest vote against the political status quo and unlikely to be repeated in Parliamentary elections, it brings yet another geopolitical uncertainty to the fore which could also be positive for gold.
Add to all the above a host of potential military flashpoints around the world, any one of which could blow up into full scale conflict at any time, plus a significant number of ISIS-indoctrinated individuals now on the loose and the world is a rather uncertain place at the moment. This could all bring safe haven demand to the fore and with the dollar – the primary safe haven currency - seen by many as currently overvalued there could be well an increasing flow into gold again. Perhaps keep an eye on the big gold ETFs to judge which way sentiment is flowing. If this seems to support Ray Dalio’s moves there could well be a decent boost to the gold price in the second half of the year.
25 May 2019