t was only a matter of time before the fragility of the current US political and economic situation was laid bare; a situation that has translated directly into the recovery of the gold price. Speculation around the health of the US bull market, the future path of interest rates, international trade, and the future of Trump himself, have seen gold surge by more than $100/oz since mid-August.
Let’s take a look at recent events.Markets were optimistic going into the final Fed meeting of the year on Wednesday 19th December. Volatility in the stock market, an ongoing trade dispute with China, sluggish economic growth in Europe, and the recent inversion of the yield curve, caused many market participants to hope that the Fed would maintain rather than hike the Fed Funds rate – despite the Fed’s promises in June to increase the rate. With rising calls for the Fed to leave rates unchanged, the price of gold-rallied and stocks began to move to the upside. However, the Fed is an apolitical body, and they decided that the current environment – in terms of GDP growth and employment data – called for another rate hike, subsequently increasing its Fed Funds rate to 2.25-2.50%.
While the June announcement had prepared the market for the rate increase, most participants looked for a dovish statement and press conference, which would have acknowledged the current market volatility and risks to the economy. The Fed subsequently reduced their guidance for 2019, cutting the number of increases in the Fed Funds rate from three to two, but it was not enough to satisfy a disappointed market. The dollar rallied in the aftermath of the Fed announcement and Chairman Powell’s press conference. At the same time, the market’s view of tightening credit as ‘toxic’ caused both stocks and gold to fall.
Gold equities weren’t spared either, with a combination of weakness in equities and the gold price itself, sending gold mining shares lower. However, the following day, gold turned higher and the US dollar fell, as fear and uncertainty gripped markets. In a reversal of fortune for the gold market following the Fed rate hike, the price approached the 50% retracement level of its fall from its April high to its mid-August low (figure 1).
Furthermore, in an additional sign of strength for the gold market, gold’s price recovery since August has been robust, even though the US dollar has moved to higher highs over the period. The most recent peak at 97.705 in the dollar index did little to deter the move to the upside in the gold futures market (figure 2).
After reaching a low of $1173.20 in mid-August, gold made higher lows and higher highs as it reached its most recent peak at $1270.30 on 20th December – a rise of $97.10 or 8.3% – a positive trend as we headed towards the end of 2018 (figure 3).
Quite simply, gold has been a beneficiary of the fear and uncertainty that is gripping the stock market these days. While other commodities, including crude oil and copper, have experienced significant price declines, the yellow metal is at its highest level since mid-July as the bullish trend continued at the end of this year.
So what can we expect this year?
All of the signals point to a continuation of volatility in markets across all asset classes in 2019. The trade dispute between the US and China continues to threaten the global economy.
Furthermore, the potential for issues on the geopolitical landscape remains high. Brexit will come to a head with a deadline of 29th March 2019. Meanwhile, the European Union faces a myriad of political and economic problems with their membership.
Russia, China, and North Korea could become problematic over the coming year. At the same time, the Democratic majority in the House of Representatives promises to create friction between the branches of government in the US. This situation isn’t being helped by the current US government shutdown over the border security issue. Markets reflect political and economic events and, as we enter 2019, there are more than a few issues that are likely to keep price variance high in markets across all asset classes. Accordingly, gold’s recent price action has been a response to the volatile year that lies ahead.
To put things into even greater perspective, let’s take a look at the performance of the gold price in A$ terms over the past 20 years. What we can see is that a situation where prices are currently trading at or very close to that – over the years – has led to our current situation of prices trading at record levels (figure 4).
This, in turn, has flowed through into the earnings of our high-flying mid-cap gold companies like Northern Star Resources (ASX: NST), Evolution Mining (AZX: EVN) and Saracen Minerals (ASX: SAR). The graphic below shows their share price performance over the past two years – a period that most experts would agree has been a tough one for the gold market (figure 5).
These companies, among a host of other Aussie gold players, have benefitted from the strong A$ gold price, robust operating margins and relatively low operating costs. They’ve been able to accumulate cash and rapidly pay down debt – a stark contrast to many overseas gold companies.
I believe that the gold price will continue the bullish price pattern that began in mid-August. There are a host of factors that are supportive of gold, not the least of which is the ongoing turmoil directly related to the Trump presidency. Trade concerns with China and the rest of the world, the ongoing Government shutdown in the US, falling equity markets, and the mass resignations/ firings taking place within Trump’s
senior hierarchy, are all attributable to one man – Donald J. Trump.
Things have the potential to deteriorate further in early 2019, with the Democrats now assuming control of the House of Representatives and former Trump lawyer, Michael Cohen, set to testify before Congress about his past dealings with Trump. There is likely to be no end to the volatility.
This is, of course, great news for gold, and I believe prices will consolidate between $1250 and $1350 during CY 2019.