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LAWRIE WILLIAMS: Nervous equities should give gold price momentum

At the start of the current week U.S. equities opened down significantly again before picking up during the day and ending marginally higher overall.  Markets are nervous and unsure what’s going to happen next - recovery or crash?  There are plenty of respected advisers out there calling it either way.  

As for gold a stronger dollar saw it slip back before making something of a recovery, but a break upwards through the psychological $1,250 level remained elusive.  Some put this down to price management in the futures markets, and this certainly can’t be ruled out.  A higher gold price implies significant dollar weakness and a visible sign that the U.S. economy is not nearly as healthy as the powers that be - the U.S. Administration, Treasury and the Fed - would like it to appear to be.  After all President Trump is keen to try to demonstrate to the U.S. people that his policies are bringing prosperity and that the country is not headed for recession.  A strong equities market helps reinforce that impression!

But the tariff war with China (the only one that really matters) may be backfiring.  Chinese imports are still rising and U.S. exports to China are diving because of the strong dollar and the imposition of retaliatory tariffs.  Hardly the outcome President Trump was looking for.  And the whole situation has been exacerbated by the arrest and detention in Canada of China’s biggest tech company, Huawei’s, CFO at the U.S. behest pending possible extradition on Iran sanctions avoidance charges.

To put this in perspective, Huawei is at the forefront of global 5G technology, arguably is the world’s leading supplier of telecoms networking technology and a bigger seller of mobile phones than Apple.  It is the world No. 2 cellphone manufacturer after South Korea’s Samsung, while Apple is only No. 3 and worryingly for the U.S., the latter company - until very recently the world’s largest by market capitalization - does around 20% of its business in China.  Apple’s saving grace may be that it has huge manufacturing facilities in China and employs over 4 million Chinese so any retaliatory action may be limited, but the sales fallout in China given the adverse publicity generated by Meng Wanzhou’s arrest could be very significant.  One suspects Apple executives will restrict any global travel plans until some kind of solution is reached regarding Meng’s arrest in Vancouver while changing planes. Indeed other executives of major U.S. companies will probably be doing likewise.

The arrested Meng Wanzhou is not only Huawei’s CFO, but also the daughter of the company’s founder, and this is a political firestorm already in process.  Much of the world is becoming increasingly incensed at the U.S. applying its own domestic laws to real, or imagined, breaches by foreign entities which may be carrying out deals which are legal in their own countries.  If anything could throw a new dimension into the trade war negotiations the arrest, and possible extradition of Meng would be it.  

We suspect an initial compromise may be implemented which could reduce some of the political tensions - but still see the problem continuing.  The bail hearing continues tomorrow and I suspect we will see Meng released on bail, but prevented from leaving Canada pending the extradition hearing. China won’t see this as a satisfactory outcome which will ensure the contretemps will continue, but at least it would ease Meng’s ordeal.

The arrest is but another significant factor which could well affect the U.S. tech sector in particular - and the this has been at the forefront of the huge equities markets gains in the past few years.  Historically the gold price thrives on economic uncertainty with people choosing it as an insurance asset and wealth protector - not necessarily as a vehicle to enhance their investment value.  It tends to perform steadily rather than spectacularly, but in the past couple of years its performance has been muted as people have looked for seemingly ever increasing gains first in bitcoin and then in the general equities markets.  But bitcoin has collapsed, and is seemingly continuing on its downwards path despite recent attempts in the media to talk it back up, while equities markets are suddenly looking very uncertain after some huge falls.  Price management and dollar strength has so far resulted in gold’s growth being suppressed, but the longer market uncertainty persists, the more likely it becomes that an unstoppable degree of upwards price momentum will fall into place.  We don’t necessarily see a spectacular and sudden rise in price, but a steady one which should see it through $1,250, and perhaps back through $1,300 by the year end - and onwards and upwards in 2019, particularly if the U.S. Fed eases up on its proposed interest rate normalization plans, which currently seems more likely than not.

If equities resume their fall this week - and unless Meng Wanzhou is released rapidly they may well do so - then the Fed might even delay the planned rate rise considered highly likely at the FOMC meeting in a week’s time which would give a big and immediate boost for the gold price.  But we consider this unlikely as things stand, but a reduction in the number of planned rate increases in 2019 has definitely to be on the cards.  Next week’s ever-opaque Fed statements will thus be perused by financial commentators with special interest.

Whatever happens at the FOMC meeting we consider that gold will increasingly appear on institutions’ and individuals’ investment horizons and price momentum will continue to build into 2019.  How far this will take us on the upwards path remains to be seen.

11 Dec 2018 | Categories: Gold, China

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