Geopolitical Risks and Trade Wars Will Restore the Bullish Course of the Gold Price
Having reached the midpoint of 2018, analysts are starting to admit that gold has been one of the most difficult assets to analyze. Quite simply, the gold price has betrayed the expectations it generated at the beginning of the year.
I don’t use the term “betray” lightly.
As the chart below shows, the gold price put up a fine performance in its traditional role as a safe-haven asset.
In December 2017 and early January 2018, even as equities were experiencing full euphoria, many investors realized that President Donald Trump was embarking on a geopolitical course akin to the infamous Sambisa Forest in Nigeria.
The gold price spiked.
Chart courtesy of StockCharts.com
Nevertheless, as tensions intensified with North Korea and Syria in April, the gold price failed to respond.
Misguided Higher Dollar Expectations
Investors have allowed themselves to follow self-perpetuating predictions of a higher dollar.
The Federal Reserve has shown an unwarranted concern with inflation. And investors have paid too much attention to exaggerated reports of economic growth without paying sufficient attention to growing income gaps—and ignoring safe-haven assets like gold.
And this is despite the fact that Bitcoin—which gave the impression of becoming something of a substitute for precious metals and commodities—has never recovered from its massive loss at the start of this year.
In theory, the momentum that propelled the gold price on the nice side of $1,300/ounce in January should have continued.
No risk seemed sufficient enough to force investors to hedge against the geopolitical risks, uncertainties, and trade wars that are challenging decades of international rules and agreements. These are going to send the financial markets crashing.
Wall Street Has No Clothes
Nobody has the courage to declare that Wall Street, like the proverbial emperor, has no clothes.
The best that can be said about the gold price now is that it has become a good opportunity for those who are still capable of thinking critically now and then.
The first bit of critical thinking applies to the dollar. The U.S. currency will likely go up in value compared to the euro. But not because of the economy having delivered a miraculous performance.
Rather, the European Union (EU) has discovered that what it has plenty of is masochism. To speak of a union is comical. The phenomenon of illegal migration has acted like rubbing alcohol on whatever remnants of glue remained to keep the EU together.
Trump’s trade wars, which have at their core a desire to favor bilateral deals at the expense of multilateral ones, will certainly do the “union” component of the EU no favors.
If trade rules and mechanisms bore you, consider that President Trump has become NATO’s worst enemy. And the media tried to convince you that Vladimir Putin was the biggest threat to the West’s defense alliance.
It’s unclear whether Trump has weakened or strengthened NATO at the summit in Brussels. He insisted that Europeans must spend more on defense, even drumming up business for U.S. defense contractors as the “best in the world.”
After boasting that he got the Europeans to pay more, he threatened to pull the U.S. out of NATO and “go it alone.” (Source: “Trump claims a phantom victory in NATO spending war,” The Sydney Morning Herald, July 12, 2018.)
A Normal Market, This Is Not
In a normal market, the uncertainty resulting from such contradictory statements from a U.S. president would have caused stock prices to fall and the gold price to move higher.
And there’s plenty of other evidence that should have caused the U.S. dollar to drop. Not least is the fact that an expected decline in global trade will necessarily imply less demand for the dollar.
Indeed, the trade wars, of which only the first salvos have been fired so far, could cause a global economic slowdown.
The trade uncertainty should be causing equity holders to panic.
It’s the oil price that has been responsible for raising the prices of most goods. It wasn’t higher demand due to growth and more jobs.
Given the geopolitical tensions, expect to see more mysterious Ghouta-like incidents as Russian-backed Syrian government forces move to grasp the city of Idlib, the town where the last remaining (and most likely Saudi-backed) jihadist forces remain.
In fact, oil prices are the real driver of inflation, not claims of magical growth. Meanwhile, if inflation rises, investors will realize in short order that it will be more sensible to “short” Treasuries.
That may finally lead more buyers to the precious metals, pulling the gold price back on the course it began in September.
A Gold Price of Some $1,400/oz Is Likely Before 2018 Ends
The gold price started out well in 2018. It got lost and confused amid the general disarray as the world had to cope with multiple changes or threats thereof.
But as the full scope of the risks becomes clearer, gold will resume a bullish course. Gold’s return to the right path should begin when the dollar starts dropping. This could begin before the end of the last quarter of 2018.
Indeed, if we were to attribute the falling gold price to one overriding factor, it would have to be the rise of the dollar, which intensified in April 2018. But it was always a “weak” rise, its cause owed much more to European weakness than American strength.
The dollar seemed to hide crucial weaknesses in the global economy stemming from the effects of an emerging trade war and multiple political crises in Europe.
The cause of the latter, an uncontrolled migration phenomenon, has not shown any hints of ending.
Sooner or later, investors will find fewer reasons to believe in a strengthening global economy and dollar, reversing their attention back to gold.
The global economy, whose vigor presumably “trickles down” to stock prices, has come under threat. Investors had plenty of information. From steel and aluminum tariffs to those directed against China, the markets have simply ignored the signs.
The Markets Can No Longer Afford to Ignore the Signs
The biggest—and most misunderstood—business story in 2018 is the trade war. Trump has launched his salvos and China has responded.
The danger, of course, is that the U.S. can enforce as many tariffs as it wants, yet China can spark a sell-off of U.S. Treasuries, as well as respond with tariffs of its own. That would affect Americans living in key pro-Trump constituencies.
The trade war and the related fears, meanwhile, have not been absorbed by the markets. When this happens, the potential of a major stock market correction or even a recession will have to be considered.
The Gold Price Could Even Reach a Five-Year High
The effects of a trade war are incalculable, and that uncertainty is the fuel that will drive it higher. One reason is that U.S.-imposed efforts to break up the current global trade order will weigh heavily against the dollar’s long-term prospects.
And then there are the geopolitical risks that will no doubt help drive the gold price even higher. From the fear of populists taking over Europe to military attacks and the higher chances of a global macroeconomic crisis, investors have finally re-discovered the purpose of gold.
Critics might point out that the Federal Reserve has announced plans to raise interest rates at a faster pace. Supposedly, they (the critics) expect the price of gold to lose its shine because of an ambitious Federal Reserve.
Others might even continue to praise Trump’s tax reform, overplaying the effects that this will have on growth. However, the only way to believe this is by ignoring the risks that have been building so fiercely.