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4 Factors That Could Lift The Price Of Gold – Hecht

4 Factors That Could Lift The Price Of Gold – Hecht

Release Date:  Friday, June 15, 2018


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Gold and Silver Prices

Gold closed down on Friday taking a large dip despite its one-month high that hit just the previous day. The potential trade war between the U.S. and China could be the next big move for gold as a hedge as a trade war would potentially be very disruptive for financial markets.

"Investors are keeping a close tab on trade tensions between the world's top two economies and if the United States imposes tariffs on Chinese goods, gold could test the overnight highs of $1,309-$1,310 an ounce, said MKS SA senior precious metals dealer Alex Thorndike."

"U.S. President Trump has made up his mind to impose ‘pretty significant’ tariffs on Chinese goods, an administration official said on Thursday, as Beijing warned that it was ready to respond if Washington chose to ratchet up trade tensions."

“With the looming U.S.-China trade deadline, investors continue to view gold as an excellent hedge against a possible equity market tumult if trade war escalates beyond the status quo, said Stephen Innes, APAC trading head at OANDA. ‘An escalation of trade war could prove extremely disruptive for financial markets, so gold should hold its bid as we enter another phase of geopolitical uncertainty,’ he said.” (PRECIOUS-“Gold slips on stronger dollar; U.S.-China trade war fears loom,” Karen Rodrigues, Reuters, 06.15.18.)

Gold ended the week down $21.50, closing at $1,282.00. Silver ended the week down $0.25, closing at $16.57.

4 Factors That Could Lift The Price Of Gold - Hecht

Wall Street veteran Andrew Hecht believes four factors- inflationary pressures; increase volatility in the market; the ongoing trade saga; and geopolitical surprises- can move the price of gold higher in the upcoming weeks and months.
"So far, 2018 has been a year of consolidation in the gold market. After two consecutive years of higher lows that began with a bottom at $1046.20 per ounce in December 2015, the price action in gold has gone to sleep over recent weeks and is flatlining around the $1300 per ounce level.

"Gold's lack of direction could be a case of all quiet before the storm, as the yellow metal remains the oldest currency instrument in the world and a store of value for central banks and individual investors all over the earth. Central banks hold over 18 percent of all of the gold ever mined in history which is a significant part of government's foreign exchange reserves. I continue to believe the medium and long-term prospects for the yellow metal are bullish. Eventually, economics or politics will cause the price of get back on its bullish path which remains intact since the December 2015 lows.

"The U.S. Federal Reserve began increasing the short-term Fed Funds rate in December 2015 when gold traded to its most recent significant bottom. The yellow metal has developed a habit of moving lower into FOMC meetings where the central bank moves to increase the short-term rate by 25 basis points and then rallying following the move...

"I believe four factors can move the price of gold higher over coming weeks and months. Each of the issues alone could be enough to trigger a rally, but a combination of events could cause the yellow metal to finally surpass the $1400 level which we have not seen since 2013.

Inflationary pressures - copper

"Following the global financial crisis in 2008, the leading central banks of the world dug deep into their monetary policy toolboxes to come up with strategies to avoid recession by encouraging borrowing and spending and inhibiting borrowing. The U.S. Fed led the way, slashing the Fed Fund rate to zero percent and instituting a program of quantitative easing...

"There are many signs of inflation in the U.S. and global economies at this time. The price of crude oil, the ubiquitous energy commodity, is appreciably higher this June than it was last year at this time. Doctor Copper, the industrial metal that tends to diagnose the health of the global economy is currently flirting with its December 2017peak at $3.3220 per pound.

"Inflation tends to be a highly supportive factor for the price of gold. A continuation of the pattern of increasing pressures could lift the price of the yellow metal that is a barometer of the economic condition. The price for a decade of dovish monetary policy is likely to cause inflationary pressures to remain a significant threat to the global economy.

Increase volatility in asset prices

"The stock market had been on a one-way trip to the upside since early 2016 when a six-week correction took the S&P 500 11.5% lower. However, the wild bullish ride that resulted in almost daily record highs throughout 2017 and into early 2018 came to an end when medium and longer-term interest rates began to rise...the increase in yields caused a sharp correction in early February 2018...the path of least resistance for rates remains higher, and that could cause lots of price variance in the stock market over the second half of 2018.

"...Interest rates have been rising from historically low levels across the yield curve, and more pressure on bonds could cause another round of turbulence in the stock bond yields rise above the dividend yield of many stocks, we could see another sharp correction in the equity market. While higher interest rates increase the cost of carrying both long positions and inventories in commodities and can weigh on prices, higher rates because of inflationary pressures are likely to have the opposite effect. The bottom line is that increased volatility in stock and bond markets could cause demand for gold to rise and lift the price of the yellow metal.

The ongoing trade saga

"...When it comes to the tariffs issue, the President has put the world on notice with tariffs on trading partners around the world including those in North America, Europe, and China. In response, retaliation has it U.S. agricultural producers, and it is possible that the current tit-for-tat environment will lead to a trade war which will distort prices around the world.

"Since the U.S. is at the center of the trade issues, it is possible that the recent correction in the dollar could end and the greenback could fall under the weight of protectionist policies. Moreover, the dollar could become a trade weapon for the Trump Administration as a weaker dollar makes U.S. exports more attractive in global markets.

"...A failure in the dollar index and escalating trade tensions could set the stage for a rally in the price of gold. A weaker dollar is typically bullish for the yellow metal, and the trade situation increases fear and uncertainty in markets across all asset classes.

Geopolitical surprises

"Finally, the world remains a volatile place filled with the potential for geopolitical events that could lead many market participants to the gold market for safety and wealth preservation. While this week's peace summit between the U.S. President and North Korean leader Kim Jong Un has lowered the temperature on the Korean Peninsula and could lead to lasting peace, there is no guaranty that the hermit nation will give up its nuclear weapons. President Trump has made it clear that without total and verifiable denuclearization, the U.S. will be left with few choices but a dangerous military option to address the situation.

"Meanwhile, the Middle East promises to continue to be a problematic region. The decertification of the Iran nuclear nonproliferation agreement and ongoing proxy war between the Saudis and Iranians could cause sudden flare-ups in hostilities in the region which would translate to fear and uncertainty in markets across all asset classes. At the same time, China's expansionary desires in the South China Sea and continued Russian provocations under Vladimir Putin increase the potential for events that would surprise markets and cause a flight to safe-haven assets, like gold.

"On the domestic U.S. front, while the President would be a candidate for a Nobel Prize for his work with North Korea, members of the opposing political party and a special prosecutor continue to threaten to undermine his administration. The mid-term elections in November will either support or frustrate his ability to continue with his agenda when it comes to legislative support.

"There are so many issues facing markets that could propel the price of gold to the upside over coming weeks and months. When, and if, gold finally decides to move to a new level on the upside, gold mining stocks will likely outperform the price action in the yellow metal. During bull markets, gold mining shares tend to rise more than the price of gold on a percentage basis." ("4 Factors That Could Lift The Price Of Gold," Andrew Hecht, Seeking Alpha, 06.13.18.)

Gold Rises to Month High After Fed Rate Hike - Parkin and Hodari

As the Fed's rate increase came in as no surprise, attention is turned to geopolitical tensions and uncertainty.

"Gold prices climbed to the highest close in a month on Thursday as traders turned their attention from central banks to geopolitical tension.

"The Federal Reserve on Wednesday said it would raise interest rates by a quarter-percentage point. Higher rates typically weigh on gold prices, prompting investors to ditch the precious metal as they seek yield-bearing assets like bonds. But a number of factors help attract buyers to the market.

"On the one hand, the Fed's rate increase was no surprise. Analysts said the decision, along with its expected course of two further increases this year, was largely baked into prices. On the other, the Trump administration's reported plan to levy tens of billions of dollars worth of tariffs on China in the days to come had traders preparing for a new bout of geopolitical upheaval.

"'We can talk about monetary policy all you want, but if the real economy is impacted by real politics here and you see a trade war,' said Bart Melek, head of commodity strategy at TD Securities, 'that will impact investment, that will impact global trade activity and ultimately employment...That is one reason gold is staying at these levels.'

"Periods of geopolitical uncertainty typically boost demand for gold as a so-called safe haven that can retain underlying value, while other asset classes may see more volatile swings.

"Protracted tension between the U.S. and everyone from China to the European Union to Canada has brought limited benefit to the gold market so far, in part because traders were waiting for the outcome of the Fed's interest-rate meeting earlier this week.

"At its meeting, the Fed signaled it could lift rates at a slightly faster pace than previously anticipated. Officials projected a total of four rate increases this year, up from three at their previous March meeting. That would leave two more to come in 2018, which many investors already expected. The central bank also strengthened its inflation outlook for the U.S. economy, which some view as positive for gold.

"'The move is less about the rate raise from the Fed and more about investors increasing their exposure to gold as an inflation hedge,' said Kash Kamal, an associate at BMO Capital Markets." ("Gold Rises to Month High After Fed Rate Hike," Benjamin Parkin and David Hodari, The Wall Street Journal, 06.14.18.)

Wall St., Main St. See Higher Gold Prices - Sykora

Gold remains bullish as the recent pullback appears to have run its course; inflation concerns exist; and investors return to gold as a safe haven to name a few.

"Wall Street and Main Street both look for gold prices to rise in the next week, based on the Kitco News weekly survey.

"The metal was range-bound for much of this week before tumbling with other commodities on Friday amid U.S. dollar strength as U.S.-China trade-war worries intensified again. Other significant news events this week were a North Korea-U.S. summit, 25-basis-point interest-rate hike by the Federal Reserve, plus a European Central Bank announcement that quantitative easing will end when 2018 comes to a close although interest rates likely will not rise until the end of the summer of 2019.

"Sixteen market professionals took part in the survey. There were 10 votes, or 63%, calling for gold prices to rise. There were four votes, or 25%, calling for gold to fall, while two voters, or 13%, look for a sideways market.

"Meanwhile, 1,081 voters responded in an online Main Street survey. A total of 683 respondents, or 63%, predicted that gold prices would be higher in a week. Another 306 voters, or 28%, said gold will fall, while 95, or 8%, see a sideways market.

"For the trading week now winding down, 59% of Wall Street and 61% of Main Street was bullish...

"'I am bullish on gold for next week for a number of reasons,' said Colin Cieszynski, chief market strategist at SIA Wealth Management. 'It feels to me like the recent pullback for gold has run its course, momentum indicators like the RSI [Relative Strength Index] have turned back upward. Gold and silver stocks are rallying, often a leading indicator for gold. The Fed news is out, leaving me to wonder what it would take to push USD [the U.S. dollar] higher in the short term.'

"Phil Flynn, senior market analyst with at Price Futures Group, and Daniel Pavilonis, senior commodities broker with RJO Futures, both look for gold to rise on inflation concerns. Both cited the metal's ability to advance on Thursday even when the U.S. dollar had a stronger tone.

"'Although gold and commodities appear in common retreat now, this could change quickly as investors return to the yellow metal for [a] safe haven,' said Richard Baker, editor of the Eureka Miner Report. 'I suspect the U.S. dollar high will occur today, and [the dollar will] decline next week as the euro regains some strength after its freefall following Thursday's ECB announcement. It is likely gold will return to the $1,300 level next week, with silver regaining $17 territory.'

"Mark Leibovit, editor of the VR Gold Letter, also said higher. 'Seasonality seems to have kicked in early. Bullish for the next few weeks," he said.

"Adrian Day, chairman and chief executive officer of Adrian Day Asset Management, is also bullish.

"'The gold market has pretty clearly already discounted the Federal Reserve's higher rates,' Day said. 'Indeed, this has been a pattern since the first hike at the end of 2015: gold falls into the hike, and then rallies immediately afterwards.'

"Kevin Grady, president of Phoenix Futures and Options, said he is neutral on gold prices for next week, putting resistance around $1,313 and $1,320.

"George Gero, managing director with RBC Wealth Management, is also neutral as the market awaits an options expiration later in the month and continues to digest Thursday's meeting of the ECB.

"'We had a bombshell with [ECB President Mario] Draghi announcing they will not raise rates for one full year," Gero said. "It is unprecedented for a central bank to say that.'" ("Wall St., Main St. See Higher Gold Prices," Allen Sykora, Kitco News, 06.15.18.)