Friday 15th Nov 2019

Sasha Planting – Daily Maverick - 

The price of gold has risen by almost 15% since the end of May 2019, driven by slowing global growth, unprecedented levels of geopolitical uncertainty, and a change in the US Federal Reserve’s monetary policy stance. With a six-year high in hand, gold bugs are rubbing their hands with glee. The question is, how far can it go?

Investors on the morning of Monday 5 August would be forgiven for believing that gold is the safest place to be in what by all accounts is a crazy world. Some analysts are saying that a price of $3,000 for an ounce of the yellow metal is not impossible.

Markets were unsettled in the first week of August when US Federal Reserve chairman Jerome Powell announced the first interest rate cut since the financial crisis and struck a more hawkish tone at his press conference than expected.

These jitters accelerated when it became clear on Monday that the simmering trade war between the US and China is far from over, could escalate, and will take casualties.

In frustration at the Chinese government’s apparent tardiness in agreeing to a trade deal, US President Donald Trump threatened last week to impose trade tariffs on another $300-billion of Chinese goods from the beginning of September 2019. These include consumer goods like smartphones, kids clothes and toys, according to Bloomberg.

So, in what looks like retaliation, China’s central bank allowed the yuan to fall below seven to one dollar for the first time in more than a decade. In a statement, it attributed the currency’s current weakness to “unilateral and protectionist measures, as well as the expectation of additional tariffs on Chinese goods”.

Possibly in anticipation of accusations of unfair currency manipulation, the Chinese central bank pointed out in its statement that the yuan has strengthened 20% against the dollar over the past two decades. Devaluing the yuan makes Chinese exports cheaper and competitive to balance out the effect of tariffs.

The Chinese government has also asked its state-owned firms to suspend imports of US agricultural products, including soya beans.

Investors are starting to recognise that the simmering tension between the US and China could bubble for a very long time, harming global growth. 1

Morgan Stanley economists said in a research note that if the higher US tariffs and China’s retaliation last for four to six months, the global economy will be in a recession in nine months.

“The markets were already jittery before the Chinese devalued their currency,” says David Melville from financial services firm Financial Hub and a self-confessed gold bug.

“Global uncertainty is rising, there are fears about huge debts that don’t seem repayable; property and equity assets seem inflated and the dollar is no longer assured of its ‘premier’ status, as it is hotly contested by China, which seems unfazed by the idea of a currency war. Add to this tension in the Middle East with Iran which looks to be provoking the US for a skirmish.”

Predictably, investors have rushed to safe havens, causing the Japanese yen to soar and pushing gold prices to their highest level in six years. Ten-year US Treasury yields, which fell to their lowest since November 2016 after Trump’s tweet on Thursday, fell to 1.77%.

At the same time, global markets from Shanghai to Johannesburg to Stockholm all fell on Monday.

The sharp rise in global uncertainty in the first quarter of 2019 was driven by US-China trade tensions as discussed, but also the need for credit tightening in China, economic stress in countries like Argentina, South Africa and Turkey, and disruptions to the auto sector in Germany caused by the introduction of new emissions standards. The uncertainty has caused the IMF to revise its projections for global growth down from 3.6% in 2018 to 3.3% in 2019, according to this article.

It is probably no coincidence then that central banks, which are known to be conservative, bought 374.1 tons of gold in the first half of 2019, the largest net increase in global gold reserves in Goldhub’s 19-year quarterly data series. And at the same time, holdings of gold-backed exchange-traded funds (ETFs) grew by 67.2 tons in the second quarter of 2019 to reach a six-year high of 2,548 tons.

Gold is an alternative asset and a favoured safe haven, thus when uncertainty increases, so does the appetite for gold. What is interesting though, is that the price of Bitcoin is also trending upwards, reaching $11,716 on Monday, its highest point since February 2018. BM

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