LAWRIE WILLIAMS: Gold back over $1,200. Dollar the key.
The gold price closed the week at a little over US$1,205 having spent much of the preceding two weeks well below that level, and indeed testing $1,170 on the downside. The gain on Friday itself was a little over $20 – quite a substantial change. But it should be noted that the gold price of late has been mostly inversely related to continuing U.S. dollar strength, and a bit of a collapse in the dollar index on Friday was largely responsible for the apparent gold price rise in U.S. dollar terms.
There is a strong inverse relationship between the dollar and the gold price. It is thus no coincidence that the dollar index (DXY) hit its strongest point in well over a year during the past two weeks and the gold price reacted accordingly by falling back - fulfilling what many feel is its true role as a perceived indicator of the strength, or otherwise, of the U.S. economy and thus of the mighty dollar itself.
That is the reason a number of commentators have strong beliefs that the powers that be manipulate (suppress) the gold price lest a rising gold price be interpreted as a weakening U.S. economy and dollar. In other words high gold prices could be perceived as suggesting that the economy is not performing as well as they would like the general public to believe. There is probably some truth in this theory with the bullion banks playing the futures markets to keep the gold price within certain limits, but whether they are doing this on their own account, or at the behest of the Fed and the government, is shrouded in controversy. Organisations like GATA will point to numerous past instances where key people at the Fed, or the Administration, have suggested that strength in the gold price could be damaging to the perception they would like to see dominating the politico/economic agenda, but proving that they may be taking actual action against gold is less easy. Evidence that they are behind any manipulation is thus purely circumstantial. But the theory should not be rejected out of hand – there is probably at least some truth in it.
But of course the U.S. is not the only entity capable of manipulating the gold price, if it indeed does. China, for example, is believed to be surreptitiously building its gold reserves – and Russia is doing so openly. Russia is doing this at the expense of its dollar holdings and reserves, while China may be doing that too, although it has enormous dollar-related foreign exchange reserves which would take a lot of time to unravel. Both thus have good reason to be happy with lower gold prices while they are in gold accumulation mode. But what happens when they have reached their gold reserve targets?
Chinese academics and officials have hinted that their gold reserve target is to exceed the holdings of the U.S. - officially 8,133.5 tonnes – while China’s officially reported figure is nearly 6,300 tonnes lower, although few believe the veracity of the gold reserve China reports to the IMF. The true figure is perhaps well north of 3,000 tonnes and rising – still less than half that of the U.S. if this is the case. But some speculate that China’s true gold reserves may even be considerably higher. The country, as the world’s largest producer, absorbs an output of well over 400 tonnes of gold a year from its mines and bought-in concentrates, and exports none. Known imports plus scrap supplies alone probably more than cover the country’s gold consumption as estimated by the major precious metals consultancies.
But back to the gold price itself. Can it hold the $1,200 level, or even rise, or will it come crashing back down again? We are almost at the end of August, which tends to be a weak month for gold anyway. We have commented before that the U.S. Labor Day holiday seems to often provide a market turning point and that is only a week away now, falling on September 3rd. We think there’s a good chance that gold will hang on to the $1,200 level until then – and after Labor Day take off to the upside, although much will depend on the dollar. The recent statement by Fed chair Jerome Powell has been seen as slightly dovish reducing the likelihood of two more Fed rate hikes this year, although the likelihood is still seen as around 62%. But given President Trump’s comments suggesting that he is not in favour of rising rates and a consequently stronger dollar, and rate hikes tend to increase the greenback’s strength vis-a-vis competitive currencies, there has to be a chance that the Fed could hold off on one of its planned rate rises before the end of 2018. It is becoming apparent to the Administration that the dollar’s gains against competitive currencies is, to an extent, mitigating some of the effects of the Trump tariff impositions, while at the same time making American exports less competitive which is not the intention of the policies, while at the same time providing a tendency to put up domestic prices for imported goods. Imports are only strong because domestic manufacturers cannot compete on price, and many have gone out of business as a result. It will take a lot of time for manufacturers to tool up and make these goods again and they will still probably be more expensive than the imports even if the latter have to deal with tariffs making them more expensive too. Higher domestic prices and a fall in exports is not what Making America Great Again is all about. President Trump may be gaining in approval ratings at the moment but that will not be maintained once the economic realities of some of his policies really begin to sink in.
So where do we think the gold price will go for the remainder of the year? Probably not to $1,400 and above as most analysts were predicting at the beginning of 2018, but substantially north of $1,300 has to be a distinct possibility. But, as always, it is tough to predict the price of gold and where it is headed and as we mentioned earlier much will depend on the strength, or otherwise, of the dollar. A disturbing factor though has been the offloading of gold from the big gold ETFs. GLD, for example, has bled over 106 tonnes of gold since end-April and is down over nearly 72 tonnes since the beginning of 2018. That is a lot of gold to be absorbed by the market and unless there is a turnaround – which may just be prompted by Friday’s price move – gold may yet well remain at depressed levels.