Abu Dhabi, UAEFriday 28 February 2020

Inside investment: A resurgent euro or Trump tweet can aid bullion prices

They are only scenarios, but several external factors are likely to come into play that will affect the price of gold, which has always been a safe haven. A random tweet from Mr Trump and the elections in France are just two of these big influencers.

Is it time to visit the Dubai gold souq, contact the Perth Mint or buy a gold ETF via your e-brokerage account?

Last year gold broke out of its four-year bear market and prices rose spectacularly to US$1,370 an ounce by the summer before retreating back in the autumn. Gold still beat the S&P 500 index for the year.

But by December analysts at Goldman Sachs, among others, said the gold market was broken again. In this column I pointed to a perfect double bottom in prices that was typical of what you would expect at the end of a bear market.

So far this year, a $200 an ounce gain in the price of gold has me smiling. However, financial markets are great humblers of forecasters and gold is presently at a tricky inflection point.

Looking at the technical charts the gold price is trying to cross its 200-day moving average price line of around $1,260. If it can do this decisively then a return to the highs of last year, or even higher, is easy enough for chartists to predict.

It has to be said it is not hard to imagine events that would cause this to happen. The unpredictable new US president Donald Trump might wake up in the night and issue a 140-character tweet that upsets markets. North Korea could go ballistic.

But absent of those events it could be that gold carries on knocking up against the 200-day moving average for a couple of weeks.

However, keep a very close eye on the first round of the French presidential election on April 23, and should no candidate win a majority, the run-off election between the two top candidates would be on May 7.

I think this election is a win-win scenario for gold prices.

First, let us assume that the far-right candidate Marie Le Pen wins. Her commitment to take France out of the euro would be like the collapse of Lehman Brothers in 2008 for the global financial system, possibly much worse.

It would certainly be a political shock to the global economy bigger than the United Kingdom’s Brexit vote to leave the EU, or the election of Mr Trump as the US president. Both of those political events were positive for the gold price, and Madame president Le Pen would be even better for gold prices.

Then again, say she loses and the conservative centrist Emmanuel Macron takes the Elysée Palace. Well, think of all those Wall Street speculators who are currently shorting the euro because they believe that after Brexit and Mr Trump, Ms Le Pen is a sure thing.

If Mr Macron wins, the euro will surge and the dollar index will crash. And what happens to commodity prices when the dollar falls in value? They all go up in price.

Gold and silver would prob­ably be the first and largest beneficiaries of a collapsing dollar as they were in the last global financial crisis, after the initial shock to precious metal prices was over. That price swing took gold to $1,923 an ounce, and silver to $49.80 an ounce on April 25, 2011.

Right now investors are still in love with the major stock markets. No matter that on some metrics US shares have not been this overvalued since the Great Crash of 1929.

Never mind that interest rates are on the way up and that the US Federal Reserve has a long history of popping stock market bubbles by raising interest rates, albeit with a small time delay.

Sure, US consumer confidence has not been this high since the 2000. But that was the start of Wall Street’s bear market and the collapse of the dot-com bubble that set the stage for the 2008 global financial crisis.

Yet if you sagely decide to sell up and avoid the coming correction – and cycles have not been eliminated from financial markets at any time in history in the past millennia – then what on Earth do you buy now?

Shares are fully priced. Bond prices are falling owing to rising interest rates. Real estate is facing similar pressure from the rising cost of money. Is there any­thing that looks cheap?

Step forward gold at $1,250 an ounce and silver knocking around $18. These are also the classic haven assets in unstable markets, and as the cracks appear in the mighty US stock market that is what we are going to have in the near future.

But I am not being alarmist and predicting a win for Ms Le Pen in the French presidential.

A resurgent euro under president Macron will hit the dollar and boost gold quite enough to be bullish about the gold price this year, and I think we can rely on Mr Trump’s help too.

Peter Cooper has been a financial journalist in Dubai for the past two decades


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Updated: March 31, 2017 04:00 AM



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