Gold has been rangebound around the US$1,300 mark for some months now, and yesterday, the day the Fed raised rates to between 1.75% and 2% was no exception. Gold started out the day a shade under US$1,300, and twenty-four hours later was trading at US$1,305.
In one sense that’s slightly surprising, as the standard inverse correlation of gold to the dollar, would dictate that as the coupon on the dollar rises, so the attractiveness of zero-coupon gold declines.
But this rate rise was well enough flagged for it to have been priced in long ago. And if the long-term trend of gold against the US dollar is always going to be down, intraday the markets were unphased by the Fed’s move, and even by the hawkish tone adopted in the accompanying commentary.
Consensus now is that rates could end the year as high as 2.4%, and why not, given that the US economy is roaring away, as President Donald Trump pointedly reminded one of his more famous critics, Robert de Niro, on Twitter on the day of the rate rise.
Of course, De Niro and Trump have been talking at cross purposes, as they both probably know. De Niro is articulating widespread Middle Class anxiety that Mr Trump is tearing up long-established customs and norms in domestic as well as foreign affairs, while Mr Trump is rightly talking up US economic strength as a point of pride.
It’s that economic strength that allows the US to export its Middle Class values, with varying degrees of success around the world. The simple truth that it was President Obama’s administration that laid the foundation for most of the current economic US strength is a nicety that’s of course lost on Mr Trump, but in that he’s no different from any other politician in taking credit for the achievement of his predecessors.
Still, for now at least, it’s his foreign policy that will likely have the most impact on the gold price if as now seems clear, the market is already pricing in further rate rises.
Gold remains the number one safe haven, and those same Middle Classes that are alarmed at Mr Trump’s tearing up of diplomatic norms and disregard for old and trusted allies may very well be inclined to make significantly more purchases of gold in the coming years than they might otherwise have done.
This is no small statement to make as far as the gold market is concerned. True, the American Middle Class isn’t the unquestioned force it once was, but it still represents one of the largest pools of capital in the world. If these people are unnerved by President Trump’s riling of Canada, his snubbing of Britain, his disdain for France, his disregard for Germany, his antagonism of Iran, his courting of Russia, his admiration for North Korea, his contempt for climate change science, his attack on the law, and even his undermining of his own Republican Party, then could it be that they will pile in and support gold, even while the dollar surges on the back of strong economic news?
And it’s not only the American Middle Class. What sort of a world are the newly emerging Middle Classes of India and China waking up in? One in which the material wellbeing they are now enjoying is no longer matched by the same cultural and political certainties of old.
So, the deepening pool of Middle Class capital in these two Asian behemoths might be drawn to gold in ever increasing amounts in a world where economic wellbeing and safety are no longer quite so intertwined as they once were.
That could put quite a floor on the gold price and will certainly act as a counterbalance to the ongoing downward pressure from Fed rate rises. The question in the coming years will be how the ratio between wealth and fear shapes up. And Mr Trump will probably have a big part to play in that.