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Uncertainty isn’t the only driver of the gold price
You would have thought a backdrop this year of a trade war, a missile strike on Syria and the return of cold war tensions would have driven up the gold price, given it is seen as an asset to own during times of strife and uncertainty. In reality gold has only moved up 1.6% in value so far in 2018.
So why isn’t the precious metal behaving as expected? You could argue that the trade war isn’t a surprise given the way Trump has behaved since being elected in November 2016. The Syria tensions have been rumbling on for some time, so too the fragile relationship between Russia and the West.
WHAT DRIVES THE PRICE?
The World Gold Council (WGC) says there is no one single driver of the price of gold. Instead, it suggests the price drivers can be put into four categories including wealth and economic expansion; and market risk and uncertainty.
It cites opportunity cost which refers to the price of competing assets such as bonds and currencies influencing investor attitudes towards gold. It also flags momentum and positioning which relates to capital flows and price trends igniting or dampening gold’s performance.
‘Drivers related to wealth and economic expansion are generally more relevant for gold’s long-term trend,’ says the WGC. ‘Drivers linked to the other three categories play a significant role in gold’s countercyclical behaviour’.
The World Gold Council makes an interesting point that the correlation between gold and US rates is waning and that the US dollar is becoming, once again, a stronger indicator of the price.
WHERE NEXT FOR GOLD?
So how high can gold go in the near-term? It’s one of those commodities where you’re guaranteed to find commentators on websites or the TV predicting with great confidence that it will soar in value. In reality, no one knows.
Instead, we would look for guidance from specialist consultants with a solid understanding of market dynamics and the metal industry such as Metal Focus. It recently suggested gold could stay range-bound in the current quarter but potentially hit $1,450 before the end of the year.
It says the latter movement could be influenced by slower than expected growth in the US; a weaker US dollar; real short-term interest rates staying negative for longer; and a correction in equity prices in the US and other parts of the world.
A move to $1,450, while not guaranteed, would imply a near-10% gain on the current price and boost profit margins for many gold miners. It certainly suggests it would be worth looking at the gold mining equity space. Our top UK-quoted pick is Centamin (CEY). (DC)