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Gold and the Waves of Fortune – breaking above $1300/oz.

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There’s an old parable about a farmer and his horse and the waves of fortune. It starts with the farmer losing his most valuable possession, his horse. A neighbor stops by and says to him “I’m so sorry about your horse”, the farmer merely replies, “There’s always some good in the bad.”  The neighbor has a hard time seeing what could be good about this, but the next day, the horse comes back with 12 feral horses, leaving the farmer even better off than before.

The recent environment surrounding the trade of gold has been a bit like this farmer’s story, especially considering the roller coaster ride gold went on last year around the election.  However, Gold has been on a steady rise since hitting a drastic low in December of last year.This month has seen the price of gold finally rise over $1300 again for the first time since November of last year.

However, this has left Fed officials trying to determine when or if these rates should be raised with inflation’s recent lackluster performance playing a major role in those discussions. Analysts and investors alike have been watching these discussions closely, and word from Jackson Hole is expected to reveal news that will only drive the value of the dollar lower.

What this means is that the precious metal may not in fact continue to rise about the 12% increase that it’s seen unless something changes.  In a fine example of “Always some good in the bad” the thing that investors are waiting to change is the level of tensions in North Korea at the moment.  If North Korea and the United States don’t cool down the political arena, then the tensions are going to escalate.  If this happens than we can expect gold to play out true to form, and increase in value as the world tensions increase.  Political uncertainty has always played a major role in gold prices, so this situation is under the microscope.1

Miners in particular are happy to hear the news, especially those that have been waiting for new mines to open so they could get back to work.  With the price of gold on the rise and tensions rising all over the world, global research firm BMI has indicated that it expects to see projects develop in active markets. In addition to Australia’s gold mining industry, which has been somewhat depressed through the past year, Shandong Gold and Shaanxi Gold of China are also expected to increase their mining operations.  So in addition to gold prices being on the rise, it appears that the uncertain times we live in may in fact provide an opportunity for prosperity for many.2

This doesn’t mean that these companies are going to conduct their business recklessly, “We expect firms to remain committed to spending cuts in an effort to reduce debt loads.” was the word from BMI.  Given this, while the growth of new mining operations seem to be on the rise, there is expected to be a note of caution involved with cost cutting measures being a primary focus.2

Aggressive growth is expected among Chinese gold firms, with Shandong Gold and Shaanxi Gold expected to invest in mining projects all over the world.  Cost cutting measures are expected to continue to remain the focus of these miners with an aim at dealing with future price volatility. BMI had this to say about the current market environment “We expect firms to remain committed to spending cuts in an effort to reduce debt loads”2

10 months is a long time for any asset to see consistent gains, and gold has been remarkably reliable in the past year.  It is speculated that there are three major elements contributing to its current growth, the already mentioned weak dollar being foremost among them.  Add in a low-yield environment and miners’ past hesitance to expand their production rates, along with newly emerging markets, and you have the perfect environment for gold to thrive and investors to profit.3

One other element that is playing heavily into the rising cost of gold, one that will support the rise for a time but may eventually drop off, is the energy related assets affected by Tropical Storm Harvey.  The damage from this storm led to a major drop off in crude oil prices, but bolstered the cost of gasoline.  Gold, as it is wont to do in the face of disaster and troubling times, has spiked along with the price of gas.

“The economic impact of Hurricane Harvey is still very hard to determine.” said equity analyst Matt Maley of Miller Tabak & Co.  Harvey’s damage is expected to equal close to $30 billion, as every aspect of infrastructure is taking hits.  Labor force, transportation, and the power grid have all been affected by this storm, and the costs continue to rise.  In sheer economic damage, it may end up being rated among the eight top hurricanes to have hit the US.4 That kind of damage is going to have a serious impact on the marketplace, and creates exactly the kind of unrest and uncertainty that gold needs to thrive.

All of these factors come together to create an atmosphere of uncertainty, from major natural disasters to a growing political unease with North Korea, there’s good news for gold investors all around.  The US and North Korea are definitely the leading characters in the worlds political drama, but the current unrest on America’s shores. Combined with recent events in Venezuela all the signs point towards the safe-haven investment of gold being a good one in the current climate.

We’ll leave you with the words of one of the world’s largest money manager, Russ Koesterich of Blackrock. He states that while he has “no special insight into the Greek drama that is modern day Washington… bet on gold’s diversifying properties…”  So gold investors, it’s an excellent time to continue managing your gold portfolio and building security against uncertainty in an uncertain world, taking advantage of that good in the bad.5

Happy Investing!

Dr. Kal Kotecha

  1. http://www.foxbusiness.com/features/2017/08/28/metals-gold-prices-continue-rising-amid-dollar-weakness.html
  2. http://www.miningweekly.com/article/rising-gold-prices-to-result-in-gradual-recovery-for-miners-bmi-2017-08-28
  3. http://www.kitco.com/news/2017-08-28/Gold-Hits-10-Mth-High-These-Are-3-Key-Drivers-Analysts.html
  4. https://www.bloomberg.com/news/articles/2017-08-27/pound-leads-surge-against-dollar-stocks-seen-flat-markets-wrap
  5. http://www.goldcore.com/us/gold-blog/diversify-gold-u-s-political-instability-advise-blackrock/
  6. http://www.macrotrends.net/1478/gold-prices-10-year-daily-chart 

 

 

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