Aside from some variations around geopolitical events, the price of gold seems to have plateaued a bit since late April. It’s still up almost 30% since the start of the year, as a weaker dollar combines with investor interest in safe havens. But, there could be a confluence of events to get gold back into its paces.
Analysts are also noting some interesting market behavior in assets that are related to gold. Precious metals are up across the board in June (unlike gold). Platinum is notable in particular because it shot up almost 30% over the last month, the best performance in the metal in almost 40 years. Palladium rose over 7% in just a week, with silver hitting 13-year highs. It has spawned speculation of a new precious metals supercycle that could help gold rise as well.
Trend or Individual Factors
Metals were in focus in the markets recently due to the trade war. Platinum is notable because its largest producer is South Africa, which faces a 31% increase in tariffs from the US if it doesn’t manage to reach a deal by next week. Reports have circulated that the country has had difficulty in reaching an accord, which could be fueling speculation that platinum prices will rise significantly.
That might explain an outlier like platinum, but it doesn’t explain the trend across most precious metals. One factor is an increase in demand for platinum simply because gold has become relatively more expensive. While this supports price pressure, jewelry is a small component of the market. It does, however, imply that gold’s overall increase can be contributing to higher prices in its peer metals.
More Demand to Come?
There are two policy factors that could have an important impact on gold in the coming months. The first is the progression of the US federal budget, which sees a significant increase in government spending. That includes raising the debt ceiling by $5 trillion. More deficit spending would likely contribute to higher inflation, which increases demand for stores of value like gold.
At the same time, the Fed is getting ready to cut rates, most likely in September. The market does see a small chance of easing in July. But lower interest rates typically increase demand for gold, since it becomes relatively more valuable as an investment. Add to that continued uncertainty amid the trade war, then there are several factors supporting old prices.
The Dollar and a Correction?
The dollar index has fallen around 10% since the start of the year, which of course contributes to a higher valuation of precious metals including gold. Investors are selling dollar-denominated assets and looking for better returns on their investment, with a significant part moving to Europe. Analysts suggest this is because investors want to get away from the uncertainty coming out of Washington.
However, a change in the different factors that are seen supporting gold could mean the yellow metal might falter. That includes a faster growing economy than expected, which would concurrently keep the Fed from easing while reducing the need for deficit spending. If there is a new supercycle for gold forming, then the US economy’s performance will be under the microscope.
