Gold consolidated above the US$1,300 level in the first day of trading in 2018, continuing a strong run that’s now lasted for two years.
Gold is now at touching highs only reached a couple of times since its fall from grace in 2010. All told, it’s has risen by more than 25% against the dollar since the beginning of 2016.
The reasons for this strength in gold are many and varied, but underlying it all is the weakness of the dollar. In 2017, the dollar endured its weakest year of trading against a basket of currencies and commodities since 2003, which was really before the last commodities boom got going.
Since then gold has peaked at close to US$1,900 in 2011, and then troughed again at around US$1,050 nearly five years later.
The subsequent recovery has come even as the Fed has continued to tighten its quantitative easing programme, and in tandem with a broad-based and general recover in the global economy.
That’s marked a strength in metals markets generally, and in recent months copper and zinc in particular. In terms of the precious metals, palladium is benefitting from dollar weakness and supply constraints – in the first week of 2018 its hit a 17-year high.
Worth noting that that’s a higher price than it traded at throughout the mining boom of the last decade.
Some indicators argue that we are in a new, albeit more muted mining and commodities boom. Sentiment towards that idea is mixed, depending on which market you’re in, with Australians currently notably more bullish than their Canadian, and in particular their European counterparts.
But gold mining as an industry is in reasonable shape, and so far seems to be seeing off the twin threats of a recovery in the resolve of Central Bankers to raise rates, and bitcoin.
Strength in other markets, in particular, the Dow Jones, is in some ways competing for the capital that’s going in to gold. But in fact, the strength in the Dow and other American indices has also been significantly supported by dollar weakness so this is a trend that’s acting in tandem with the gold market rather than in opposition to it.
Buyers are still coming in to some extent too on the uncertainty generated by Donald Trump. The attractiveness of gold as a safe haven remains marked in a world where nuclear powers are able to exchange insults on Twitter. The US’s latest argument with Pakistan is interesting, with both sides arguing that they don’t need each other.
But it would be interesting to see who blames whom if Pakistan is chased out of the US global power structure and into Chinese arms by a US President seeking simple explanations for complex solutions.
The Kitco website handily separates out the effects of the US dollar on the gold price. For example, on Tuesday January 2, roughly three-fifths of the US$8.00 upward move that had been booked by 12pm GMT was attributable to weakness in the US dollar, with the remaining strength coming from active on-market buying.
However, elsewhere on Kitco, comes a word or two of caution. The gold market is always thin around Christmas time, and has frequently been distorted at the end of calendar years by investors balancing books and undertaking other similar tidying-up exercises.
That the strength has continued into the first day of trading in January is perhaps encouraging, but it probably won’t be until the first full week of trading in the year that we get a real idea of the direction gold will take.