LAWRIE WILLIAMS: Some encouragement for gold bulls – GLD adds 4 tonnes
After a minor couple of withdrawals during the week after the Labor Day holiday, investment in the world’s largest gold ETF – SPDR Gold Shares (GLD) – has turned positive again and has added just over 4 tonnes of gold in the past couple of days, despite the gold price falling in U.S. trade down, at one time, to below the $1,320 level. The fall in the gold price is probably attributable primarily to a small recovery in the U.S. dollar where the dollar index has risen back to above 92 after a consistent fall over the past few weeks down at one point to below 91.5. As a comparison, the dollar index at the beginning of the year was at over 103 in the first week in January and has thus fallen by around 11% from that level. Gold, even at its current lower price after its heady rise to above $1,350, has risen by 14% this year. (The S&P 500, as a comparison, is up around 17%). Consensus is that the dollar could well have further to fall yet.
The other factor, of course, in the recent gold price weakness, is that the perceived geopolitical risk of military action by the U.S. against North Korea has diminished with the U.S. pushing the economic sanctions route to try and keep that country’s Supreme leader Kim Jong-un’s aggressive rhetoric and nuclear weaponry development and delivery advances in check. We somehow doubt the increased sanctions route will make any difference here and the perceived risk of military action will likely continue to wax and wane with further missile and bomb tests by the Asian country. Indeed sanctions may create major difficulties with China with an overt threat by U.S. Treasury Secretary Steve Mnuchin to cut China off from the U.S. financial system should it continue to trade with North Korea, although such a move would probably only accelerate China’s potential attack on the U.S. dollar in global trade.
There is very much a perception that Kim Jong-un and Donald Trump are both crying ‘wolf’ and that neither will – or indeed are capable of – carrying out their strongest militaristic threats. Following the United Nations’ decision to increase sanctions on North Korea, although not to the extent the U.S. would have liked, North Korea’s response was to further increase threats against the U.S. and its allies. A Reuters report today notes that “A North Korean state agency threatened on Thursday to use nuclear weapons to “sink” Japan and reduce the United States to “ashes and darkness” for supporting a U.N. Security Council resolution and sanctions over its latest nuclear test.”
Interestingly equities markets and currencies in the countries most under apparent threat from North Korea, are mostly unfazed by the threats – they have heard North Korean aggressive rhetoric many times before and are well aware that these threats have so far never been followed up by action.
However Kim may find provoking the U.S. is somewhat different in that the country may take his threats more seriously than his immediate Asian neighbours. After all, the U.S. mainland has not been threatened with nuclear attack since the peak of the cold war with Russia and its allies some years ago. And where U.S. security is threatened the nation tends to react. Take the Cuban missile crisis for example. In that case the Russians caved in to the U.S.’s counter threat. Will Kim do the same? Logic suggests he should, but he remains something of an enigma in this respect. It currently very much looks like his country will carry on with its weapons development programmes regardless of U.S./U.N. sanctions, particularly if China largely ignores these.
And therein lies another threat. Will President Trump impose sanctions on China. A trade war with China could well backfire on the U.S. and accelerate China’s overt trade ties with Russia and many Asian and other nations. China and Russia individually may not pose a serious economic or military risk to the U.S., but combined they could well be such.
The other major factor affecting gold sentiment in the U.S. and ultimately the gold price itself is what the U.S. Fed will do with interest rates – and most importantly when it may do it! Next week’s FOMC meeting will be watched closely for clues. But a recent report in the highly respected Financial Times commented that “Half of all market participants, for example, believe that the next Fed rate rise won’t be until September 2018 and others believe the US central bank will hold fire until the end of 2019.” The likelihood of a further U.S. interest rate rise this year, however small, seems to be coming less likely with every successive release of economic data. However we do still see the possibility of one more Fed rate rise this year as a possibility, if only to save a little face given its prediction at end-2016 of three or four rate rises this year in the progression towards U.S. interest rate ‘normalization’.
There is thus much that looks to be positive for gold, though, in the geopolitical and geo-economic short term. Asian demand for physical gold remains relatively strong and it would only take a small turn-around in North American sentiment to impact physical gold supply and positively affect the gold price as a result. We think this more likely than not - particularly if the war of words between North Korea and the U.S. continues, as do the North Korean missile and bomb tests. This dichotomy could run and run and a $1,400 gold price by the year end – as some analysts are predicting – does not seem outside the bounds of possibility.