Up, Up and Away – a 1967 smash hit by the 5th Dimension, won several accolades including the Grammy Award for the Song of the Year. When yours truly observed the bullion charts of recent times, I could not help but draw a comparison with the song and hence the title. Resonating with the lyrics, gold climbed towards a six year high in an astounding move this year drawing parallels with the heights achieved in 2011. Commencing the year on $1282.09 per troy ounce, gold has inclined by 21% to attain the highest price at $1557 per troy ounce on September 4. Analysts have opined that it has been some years since such volatility has been witnessed in gold. This increase has been attributed to a change in sentiment and investor behaviour. During moments of despair and general conundrum, traders usually select alternative assets with the potential for higher returns. Gold has benefitted immensely from this paradox since the beginning of 2019.
Increased Money Flow
One of the imperative reasons for the dramatic increase in gold is the continuous escalation in the US-China trade war and a general fear of a global slowdown leading to recession in the USA. Coupled with the recent slide in the emerging market assets, the perpetual unrest in Hong Kong has added robust tailwinds to the yellow metal. Not far from the picture, the Federal Reserve has also set itself on a prospective interest rate easing path.
Market pundits have opined that if the Federal Reserve does not change its status quickly, we may be at the beginning of a long term course of easing through injecting dollars into the financial markets to help prevent recession again. In short, the more money the Federal Reserve prints, the higher the value of gold in the long term.
Weakening Bond Yields
Since the financial market is integrative and complementary, the recent slump in the ten year treasury yield below 1.5% along with sell-off in the stock market and resulting decline in the US Dollar versus the Japanese Yen has also proved to be a catalyst in strengthening the gold price.
Declining bond yields and a depreciating greenback are both drivers for gold to attain higher grounds. Likewise, gold benefits during periods of ultra-low interest rates as it offers investors a better alternative to bonds with little or no returns.
The greenback will invariably lower if the Federal Reserve continues in its easing goal. With the other central banks, including the European Central Bank and Bank of Japan, already at zero or negative benchmark interest rates, the Federal Reserve has even more flexibility to lower the value of US Dollar in comparison to the value of other major currencies.
Although gold reflects the current economic conditions, many investors believe that changes in the price of gold can impact the economy. A depreciating US Dollar can make the bullion a more attractive investment in other currencies. On the contrary, an appreciating US Dollar signifies that even if gold price remains flat in dollar terms, gold becomes dearer in other currencies whose value has declined vis-à-vis the greenback.
Financial assets other than gold tend to outperform when the economy is robust and growing. The rise in the value of stocks makes the opportunity cost of owning gold and other commodities less attractive since the commodity bracket does not generate any income. However, as the economy weakens, the demand for stocks and other assets falls changing the course of money flow towards more stable investments such as gold.
The surge in gold is time and again primarily driven by geopolitical instability and it does not seem to be slowing down anytime soon. Increasing tension in the Middle East and Hong Kong along with the uncertainty surrounding BREXIT are factors why investors knock on the door of gold. The geopolitical game is enveloped with vagueness and ambiguity and this provides investors all the more reason to increase their portfolio investment in gold.
The cliché – you can run but you can’t hide – is apt for gold in contemporary times. The bullion has on several occasions proved to be the saviour for numerous investors. Hence, if current factors persist, do not be surprised to witness a grander flock of investors parking their cash on the alternative asset as we enter the last quarter of 2019.
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]