Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
How To Play The 2018 Cannabis Boom - 18th Dec 17
Should You Consider Investing/ Buying Gold or Bitcoin? - 18th Dec 17
Gold EFPs: Absolute Proof that the Paper Gold Price is a Fraud - 18th Dec 17
Gold – Technical Obfuscation, Fundamentals, Predictions - 18th Dec 17
Stock Market Final Thrust is Likely - 17th Dec 17
Never Mind Tea Leaves, Here’s a Strong Signal from the Economic Dashboard - 17th Dec 17
As Bitcoin Breaks All-Time Highs Near $18,000 Its Future Has Never Been So Uncertain - 17th Dec 17
Best Time / Month to Buy a Used Car From a UK Dealer - 16th Dec 17
Relief Rally in Gold Mining Stocks - 16th Dec 17
Amid Bad Fundamentals, Gold Sector Rally May Have Begun - 16th Dec 17
Gold Bullish on US Fed Interest Rate Hike - 16th Dec 17
The LORAX Explains What Happened to Sheffield's Street Trees 2017 - 16th Dec 17
Bitcoin Trading Alert: Bitcoin Pauses – Will Appreciation Follow? - 16th Dec 17
SanDisk Ultra 128gb 100mbs Micro SD Card for Smartphone's Speed Test - 15th Dec 17
Inflation is Spiking Globally… Bond Bubble Bursts in 3… 2… - 15th Dec 17
Sheffield's 'Real' LORAX Defending the Trees From the Labour City Council Patrol Units - 15th Dec 17
Stock Market Decline Signals are Near - 15th Dec 17
Santa Is Putting Christmas On The Blockchain And Saving Billions - 14th Dec 17
The Unprotected, the Protected, the Vulnerably Protected Classes—Which Are You? - 14th Dec 17
Gold’s Upside Target - 14th Dec 17
Year-end US Interest Rate Hike Again Proves To Be Launchpad For Gold Price - 14th Dec 17
2 Charts That Might Define the Fed’s Jerome Powell Era - 13th Dec 17
UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - 13th Dec 17
Stock Market Elliott Wave Forecasts - Is the World coming to the end? - 13th Dec 17
A Method Traders Can Use to Confirm an Elliott Wave Count - 13th Dec 17
Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - 13th Dec 17
A Former Wall Street Veteran: Good Traders Are Born, Not Trained - 12th Dec 17
Buy Gold, Silver Time After Speculators Reduce Longs and Banks Reduce Shorts to Continue? - 12th Dec 17
Masters of Economic and Political Illusion – in Taxes, Debt, Government, and Markets - 12th Dec 17
Approved Used Land Rover Main Dealer Real Customer Buying Guide - Hunters, Chester - 12th Dec 17
Gold Price 100% Bullish Signal - 12th Dec 17
Epic Stock Market & Fixed Income Bubble Will Not End Well - 12th Dec 17
Bitcoin can be stolen. Although Can’t be hacked - 11th Dec 17
Have Stocks Reached A Permanently Rigged Plateau? - 11th Dec 17
Trying To Beat The System Is A Fatally Flawed Investment Strategy - 11th Dec 17
Is This The Beginning Of The Next Silver Rush? - 11th Dec 17
The Dow Gold Ratio - 11th Dec 17

Market Oracle FREE Newsletter

Traders Workshop

Toward the New Gold-en Era 

Commodities / Gold and Silver 2017 Apr 20, 2017 - 11:09 AM GMT

By: Dan_Stinson

Commodities

In the past half a decade, gold prices were fueled by negative rates. Now gold is driven by geopolitical risks, efforts at gold-backed trade and local prices.

Not so long ago, the conventional wisdom was that the continued recovery of the US economy would support rate hikes and thus the strengthening of the US dollar, which would pave way for gold’s further decline.


It was conventional wisdom at its best; persuasive but flawed. In reality, US recovery does not mean a return to the pre-2008 world, but secular stagnation across the major advanced economies. Consequently, as I have argued since the early 2010s, the Fed’s rate hikes will be lower and have longer intervals than anticipated.

While the Fed has begun its tightening trajectory, central banks in Europe and Japan continue to maintain quantitative easing and record-low interest rates. Historically, periods of low rates - not to speak of negative rates - tend to correlate with gold returns that are significantly higher than their long-term average.

But is the implication that the return of rate hikes will mitigate gold gains? No, not anymore.

Geopolitical risks and gold-backed world trade

After months of gains in 2016, gold decreased to $1,140 in December. Nevertheless, the past quarter has witnessed a wave of new gains as gold recently rallied to a five-month high closing at $1,290.

Today, there are new drivers behind gold as tensions are rising in Syria, North Korea and elsewhere. With increasing global jitters, investors are seeking out traditional havens from geopolitical risks.

There’s more to come. While Marine Le Pen may not win the second round of the French election in May, the bitter political struggle has increased short-term uncertainty in Europe, which will soon also witness the German election and Italy’s parliamentary turmoil. While Trump’s campaign priority was to reset US relations with Russia, the ties between Washington and Moscow are now worse than before.

As investors are escaping to traditional global safe havens, Treasuries are no longer the obvious choice as central banks have turned the bond market into a bubble. Instead, gold, which remains under-represented in many portfolios and under-valued in current prices, seems a safer bet.

The role of gold may also be shifting in world trade. In March, the Russian central bank opened its first overseas office in Beijing to foster Sino-Russian monetary cooperation. The move took place at a time when Moscow is preparing to issue its first federal loan bonds denominated in Chinese renminbi, while Russia - the world’s fourth-largest gold producer after China, Japan and the US - may become a major supplier of gold to China.

All of these scenarios contribute to speculation about efforts to shift to a gold-backed standard of trade and thus bypassing the US dollar.

Local prices drive gold - not US dollar

Today, gold is still priced in dollars and thus assessed in relation to the US currency. On the other hand, some 90% of the physical demand for gold comes from outside the US. So, for all practical purposes, most investors already price gold in their local currency - particularly Chinese renminbi and Indian rupee - not in US dollar.

For non-dollar buyers of gold in the emerging economies, it is the local price that matters most. In 2016, as the dollar strengthened, gold’s return in euro, sterling, Indian rupee and Chinese renminbi was higher than gold’s return in US dollars. According to indicators that track the price of gold from a non-dollar perspective, gold’s return has been on average 2.3% higher per year than the return of gold in dollars for the past decade, driven by periods of dollar strength.

The simple conclusion is that, viewing gold from an exclusive dollar perspective effectively ignores the benefits that global investors - particularly those in emerging economies - derive from adding gold to their portfolio.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The original, slightly shorter version was published by South China Morning Post on February 28, 2017

© 2017 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife