Alexander Le Grys
The price of gold rose 0.2% to settle at $1,280.25 per troy ounce (oz t) this week in New York, and with little fluctuation occurring in 2017, some suggest this precious metal has stagnated. The price has remained within the $1250-1350 range since April 2016, except in December 2016 following a surge in the dollar in response to Trump’s shock presidential election. The consistency of value has created a divide over gold between those who are bearish and those who are bullish.
Firstly, bearish proponents in the gold market believe fundamental changes in the foreseeable macroeconomics of the global economy may put the precious metal on a perilous path. As a world recovery gathers pace, the Federal Reserve is shrinking its balance sheet and raising interest rates. The Fed started its latest tightening cycle in December 2015, with four rate hikes so far and another expected next month. Other Central Banks are moving the same way. The European Central Bank (ECB) is about to begin receding bond purchases to €30 billion euros, half the current pace, while the Bank of England raised interest rates for the first time in more than a decade earlier this month, and the People’s Bank of China will probably intensify efforts to reduce the build-up of debt. This scenario makes it very hard for a non-interest bearing asset like gold to do well.
Linked to the reasons above, the demand for gold has slumped to an eight-year low, resulting in reduced buying by institutional investors. Data released by the World Gold Council on Thursday 9th November showed demand for bullion fell to 915 tonnes in the third quarter, down 9% year-on-year. The latest figures were hit by “significantly” lower inflows into gold exchange traded funds (due to a stronger US dollar), which fell to 19 tonnes from 144.3 tonnes, and a softer jewellery market in India. After three consecutive quarters of growth, demand in India following a new tax regime (the world’s biggest consumer of gold after China) dropped 25% year-on-year in the quarter to 114.9 tonnes.
The bulls in the gold market, albeit in a minority, have also turned heads. Firstly, investors in gold believe that in addition to interest rate hikes, nominal inflation will pick up, putting faith in a rising oil price due to OPEC’s expected supply cuts. Historically, the price of gold has risen during times of inflation as investors look for an inflation hedge to provide protection against the decreased value of their respective currencies.
Furthermore, the bulls in gold have strongly argued that it is fallacious to think that cryptocurrencies could replace gold as a financial hedge. They argue hype and speculation are the drivers to cryptocurrencies’ value. Since the beginning of the year, the value of Bitcoin has more than quadrupled. Among others, Ray Dalio founder of Bridgewater Associates, one of the world’s largest hedge funds, and Jamie Dimon CEO of JP Morgan, have called Bitcoin and its counterparts a ‘bubble’. At the end of September this year, Dalio’s Bridgewater Associates boosted its holdings in SPDR Gold Shares almost seven-fold believing the value of the metal will soar once the cryptocurrency bubble crashes.
Whilst cryptocurrencies are unlikely to replace gold as a financial hedge, caution is advisable. Many are comparing the current state of blockchain cryptocurrencies to the early days of the internet – a digital wild west teeming with opportunity. On balance it seems likely that the price of gold will remain flat over the coming months. Minor movements around the £1300 t oz. seem most likely, with any bullish movements by investors expected to be more painful than rewarding.