Gold punched through the US$1,350 mark in early trade on Friday amidst a combination of a weaker dollar and safe haven buying in response to heightened geopolitical risk.
That puts gold’s gains over the past nine months, since a low of around US$1,200 was reached in September 2018, at around US$150 per ounce, or just over 12%.
For a sector that was decidedly bearish all through 2018 and much of early 2019, that’s not bad going.
Two things though have changed the outlook for gold.
The first is the Federal Reserve has all but reversed its position on interest rates and is now likely vote in two or more increases over the next few months. At the beginning of the year it was thought that rates would be cut, so this is not just a swerve, it’s a full on U-turn.
Cheap money is good for business, and so the equity markets like it. And it’s good for assets priced in dollars too, like commodities, since you get more dollars for your product. As long as the dollar remains the world’s reserve currency, the relative fluctuations a weaker dollar is always going to be good for those holding or mining gold.
But there’s a second reason that gold has jumped in the past couple of days, and that’s geopolitical risk.
The headlines aren’t exactly dominated by the recent attacks on the oil tankers in the Persian Gulf, but there’s a definite awareness of what’s happening in markets. The latest two attacks followed attacks in May, and although Iran has denied responsibility, that’s where the US is pointing its finger and everyone else seems to agree.
It certainly makes sense that Iran would be behind the attacks, although precisely why remains a matter of conjecture.
One interpretation would be that following the withdrawal of the US from President Obama’s nuclear non-proliferation treaty with Iran, the Iranians are now seeking to reassert a strength that they had formerly held in check as part of the broader arch of the deal with the west. In this analysis, it’s President Trump’s fault that Iranian aggression is on the rise, as Iranian moderates have been pushed aside, and hardliners have come in, who argue that with the US attempting to shut Iran out of the global oil markets an aggressive response is the only logical one.
US hawks would look at it slightly differently though. Under the analysis of the likes of National Security Adviser John Bolton, the application of severe political and economic pressure on Iran by President Trump is beginning to bite. The Iranian regime is twisting in the wind and lashing out in irrational ways that show it’s running out of options.
There is probably some truth in both analyses. Of the tankers attacked in May two were Saudi-owned, and Saudi has been in a proxy war with Iran in Yemen for some time. Nothing irrational in that. But to attack a Japanese tanker when the Japanese prime minister was in Iran attempting to cool the situation does seem more of a hot-headed move. It may be the case that Iranian policy makers are at odds with each other and that the attack on the Japanese vessel was an attempt by one faction to disrupt the negotiations of another.
Whatever the truth of the matter, buyers are likely to come into gold as a result. It’ll be interesting to see what happens next, as President Trump has chosen to take an extremely tough line on Iran, whilst simultaneously promising his base that he will not entangle the US in any more foreign wars. The Iranians will know this. But they will also be well aware of the US fifth fleet, which operates out of Bahrain in the Persian Gulf, and which was involved in the rescue efforts when one of the tankers was attacked.
It’s a delicate balance that could easily be upset. Doves would argue that President Trump upset it when he withdrew from the nuclear deal after he came into office. But markets can’t trade past events. For the time being the hawks are in the ascendant in the US and in Iran. And every time there’s a flashpoint, expect a nifty little spike in gold.