Diggers and Dealers Mining Forum 2018 will welcome some high-profile gold miners to the presenters’ podium next week. But what about the gold price? ABC Bullion global general manager Nicholas Frappell gives Proactive Investors his prediction on where the price will travel.
Frappell told Proactive Investors he expected the gold price could reach a low of US$1,180 an ounce but the longer term outlook would be more positive.
The US spot gold price was trading around the $1,211.58 mark this morning.
ABC Bullion global general manager Nicholas Frappell
Frappell, whose experience includes precious metals marketing and trading, highlighted a number of factors he believed could positively affect the gold price.
“The strong US economy is likely to lead to an increase in the US trade deficit, which will lead to a weaker US dollar,” he said.
One US dollar was buying $1.36 Australian yesterday after the bell tolled at the Australian Securities Exchange.
The Australian dollar was only buying US73.77 cents about 7pm last night.
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Frappell noted bond yields had risen, which is why gold had struggled.
Yields are the coupon value of a government bond, divided by its market value and then expressed as a percentage.
When government bonds become riskier some investors move on.
The global general manager of the Papillion group business, ABC Bullion, believes increased bond risks might push investors to return to the safe haven of gold.
Frappell said: “Weaker economic growth in the US should be supportive of gold and draw a line in the Fed’s current tightening phase.”
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The bullion manager and former Mitsui & Co. Precious Metals vice-president shared his outlook on the probable effects of a weaker US dollar.
Frappell said: “Given near-term US dollar strength, gold’s weakness may extend to US$1,180.
“However the longer-term outlook is more positive for gold, when considering macroeconomic drivers and also when considering relative valuations such as the SPX/Gold ratio.”
The SPX 500 to Gold Ratio compares the Standard & Poor’s 500 market index to the price of gold.
The SPX 500 to Gold Ratio over the past century
With the SPX 500 being a measure of the market capitalisation of the largest 500 companies on the New York Stock Exchange and the Nasdaq Stock Market, it’s a good litmus test for the state of the US economy.
Frappell said: “Rising yields are a sign of weakness as the US funds a growing debt pile.
“The flattening yield curve may signal that the US is about to enter a period of weaker growth, although some of the flattening effect may also reflect an increase in the supply of shorter-dated paper.”
US President Donald Trump at his January 20, 2017 inauguration
The Trump factor
As Diggers and Dealers Mining Forum chairman Nick Giorgetta highlighted earlier this week in an interview with Proactive Investors, US President Donald Trump tends to affect the gold price.
Giorgetta predicted a continuation of the trend: “I think the Trump factor will play some part in the next six to 12 months.”
Gold prices have enjoyed an interesting few weeks since US President Donald Trump threatened Iranian President Hassan Touhani with “consequences the likes of which few throughout history have ever suffered before”.
The explosive tweeting less than a fortnight ago on July 22 bumped the gold price, pushing it down to US$1,229 an ounce.
Gold price fluctuation over the past decade
The price had been on the decline from May 15 when the chart turned down at U$1,303.80 an ounce.
Its ceiling price for the past two years has been the US$1,362.40 it was trading for on January 25, and it has travelled in a downward trend from since then.
The gold price had also sunk in late 2016 from November 3, just before the US Presidential Election 2016, when the price was US$1,302.10 an ounce, then US$1,272.60 the day after the Republicans’ victory.
People expected Trump’s policies would have an inflationary effect, push up interest rates and strengthen the US dollar, making investments besides gold more attractive.
The price then travelled further down to what is now a two-year US$1,127.80 floor price seen on December 16, as allegations of Russian interference in the US election heated up.
The gold price then began an upward trend with some marked corrections in 2017 until September 7 that year, when price peaked at US$1,345.10.
Frappell acknowledged weakening gold price trends in the current market, comparing current levels to those seen during Trump’s first year of administration.
“Gold prices in US dollar terms are back to the July 2017 lows after a US$150 decline from the April 2018 high,” he said.
“Gold found support at the US$1,195-1,204 level on major dips in 2017, and it is reasonable to expect support at those levels again.”
A comparison of short-selling and long-selling volumes for gold
The former shorts, forwards and exchange-traded futures trader pointed to U.S. Commodity Futures Trading Commission tracking of speculative trading, or hedging, as a positive sign for the gold price.
Frappell said: “Speculative shorts — as measured by the CME Managed Money sector — hit 14.67 million Tozs on the 24th of July this year, compared with 2.18 million Tozs in early March, and this is the largest short bet in the market since the CFTC started this measure of positioning.
“Whilst this bet has worked very well for the shorts, eventually large positions have to be bought back, and generally, short positioning tends to revert to a smaller average position than longs (as shown on the above chart).”
Frappell noted the current strong US dollar and higher yields had “contributed to a weaker gold price”.
“Gold has weakened on a combination of a stronger dollar and higher yields, with real interest rates strengthening as the Fed switches to ‘Quantitative tightening’ and an increased supply of US government debt hits fixed income markets, just when there are signs that other central banks are less willing to buy bonds,” he said.
“Dollar strength looks likely to continue with the US outperforming other regions after a long period of easy money, combined with a late-cycle fiscal splurge in the US.”
But Frappell expects a turnaround. And it’s a turnaround gold miners and traders alike hope will come about, despite all the political turmoil.
To view this year’s Diggers program, visit https://diggersndealers.com.au/#programme.