U.S. Political Uncertainty, Inflation To Support Gold Prices

Release Date:  Friday, September 21, 2018

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Gold and Silver Prices

Gold prices closed higher for the week for the first time in four weeks despite slipping lower on Friday due to record high U.S. stocks and a higher dollar.

"Gold prices edged lower on Friday as the dollar firmed on persistent concerns about an escalating trade between the United States and China in a week where both sides slapped new tariffs on each other's goods. Mitigating further losses in gold were views that new U.S. and Chinese tariffs were set at lower rates this week than expected.

"The fact that concerns eased a bit this week weighed on the dollar a bit but that has reversed and so that is why gold is easing," said FOREX.com analyst Fawad Razaqzada, adding that gold was facing resistance between $1,205-$1,215 per ounce.

The dollar rose against a basket of major currencies, making gold more expensive for holders of other currencies, while equity markets and bond yields rose.

Investment bank Goldman Sachs slashed its three, six and twelve-month gold price forecasts but said there were signs that fundamentals were starting to change, with a recent weakening of the dollar and a rebound in Chinese and Indian gold purchases.

The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, is at a record high of 83." ("Gold eases on firm dollar but heads for first weekly gain in four," Reuters Staff, CNBC, 09/20/18, updated 09/21/18.)

Gold ended the week up $5.70, closing at $1,198.80. Silver ended the week up $0.22, closing at $14.25.

 U.S. Political Uncertainty, Inflation To Support Gold Prices-Mitsubishi - Christensen

Mid-term elections and inflationary pressures can possibly provide support for higher gold prices.

"Although gold prices have been stuck in a rut around $1,200 an ounce for five weeks, one precious-metals analyst sees potential for the yellow metal as U.S. investors are ignoring growing domestic political and inflationary risks.

"In a report released late Monday, Jonathan Butler, precious-metals strategist at Mitsubishi Corp., noted that the U.S. mid-term elections are less than two months away and the results could have implications for the U.S. dollar and in turn gold prices.

"'It is no secret that Donald Trump's presidency hinges on the mid-term elections - if the Democrats gain control of the House of Representatives in November, impeachment proceedings could begin in fairly short order,' Butler said. 'The political uncertainty engendered by an impeachment could see the dollar lose ground and give some support to gold.'

"Aggregated polling data shows that Democrats have a more than eight-point lead over Republicans in a generic congressional vote ahead of the Nov. 6 election.

"With the market becoming one-sided towards risk assets in the current economic climate, there is a danger that the current U.S. political risks will be overlooked," Butler said.

"The second factor Butler sees supporting gold prices through the rest of the year is inflationary pressures. He noted that inflation is already at the Federal Reserve's 2% target as the economy continues to grow and the labor market tightens.

"'It would not take much for inflation to outstrip nominal rates, increasing the attractiveness of gold as an inflation hedge,' he said. 'The key question is if U.S. growth can remain on track, allowing President Trump to claim electoral credit for his tax cuts and for the Fed to maintain a steady rate hike path that will keep inflation in abeyance.'

While there are supportive factors for gold down the road, Butler acknowledged that the market still has to deal with difficult headwinds in the near term, manly the strong U.S. dollar... However, despite the continuous threat of from a stronger U.S. dollar, the gold market has been relatively resilient as it hold above critical psychological support at $1,200 an ounce." ("U.S. Political Uncertainty, Inflation To Support Gold Prices-Mitsubishi," Neils Christensen, Kitco News, 09/18/18.)

Silver's Discount to Gold Is the Biggest Since the 1990s - van der Walt and Pakiam

The current gold to silver ratio displays how undervalued silver really is.

"With gold the most expensive relative to silver in more than 20 years, investors in exchange-traded funds are betting on the cheaper metal.

"Bullion is about 85 times more expensive than silver per ounce, a ratio not seen since 1995. Both metals have been hammered this year, falling as the dollar rose and investors opted for the yield offered by stocks and bonds.

"...those tracking silver have climbed 2.3 percent. The cheaper metal typically trades as a higher-beta asset, meaning an upturn in precious metals would tend to benefit long positions in silver more.

"'Smart investors and long-term investors are seeing a lot of value in silver at these levels,' said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt by phone. He expects silver to rise 17 percent by the end of the year, twice as much as gold. 'Silver prices are low in both relative and absolute terms.'" ("Silver's Discount to Gold Is the Biggest Since the 1990s," Eddie van der Walt and Ranjeetha Pakiam, Bloomberg, 09/18/18.)

China must retaliate against US tariffs, Commerce Ministry says - Srivastava

The U.S. and China trade war seems to be getting worse with the imposed tariffs which leaves China no choice but to retaliate.

"China has no choice but to retaliate against the latest round of U.S. tariffs in order to safeguard its rights and interest in a free trade world, the country's Commerce Ministry said in a statement on Tuesday.

'While the statement gives no timeline or details of the nature of retaliation, it blames the U.S. for bringing uncertainty to the relationship between the two countries.

"The U.S. insists on increasing tariffs, which brings new uncertainty to the consultations between the two sides. It is hoped that the U.S. will recognize the possible negative consequences of such actions and take convincing means to correct them in a timely manner,' the statement said.

"Adding to these comments, the Chinese Foreign Ministry said on Tuesday that the United States has not been 'sincere' and talks on an equal footing are the only way to resolve this issue.

"On Monday, President Donald Trump announced he will impose 10 percent tariffs on $200 billion worth of Chinese imports, and those duties will rise to 25 percent at the end of the year.

"The White House removed about 300 goods from a previously proposed list of affected products, including smart watches, some chemicals and other products such as bicycle helmets and high chairs.

"'This is somewhat more severe than the market had anticipated, given recent rumors for an outright rate of 10 percent, and the tone of the statement was somewhat hawkish, including an assertion that 'if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports,' Deutsche Bank said in a note to its clients on Tuesday.

"The U.S. has already levied tariffs on $50 billion worth of Chinese products. Beijing responded with measures targeting $50 billion on American goods, raising fears about damage to the U.S. farm industry.

Earlier this month, reports suggested that the U.S. was seeking to restart trade talks with China.

"In a research note on Tuesday, Mark Haefele, global chief investment officer at UBS Wealth Management said the U.S.-China trade tensions will get worse before they better. 'An intensification of the U.S.-China trade spat is a near-term negative for risky assets, raising the specter of an economically damaging trade war in which high tariffs are imposed on most or all U.S.-China trade.'" ("China must retaliate against US tariffs, Commerce Ministry says," Spriha Srivastava, CNBC, 09/18/18.)

Opportunity knocks for silver as GSR hits 25 year high - Williams

Silver is a great opportunity right now with great potential upward movement.

"We have gone on record as suggesting that the Gold:Silver Ratio (GSR) should be more like 70 or less, but in recent weeks we have seen the gold price decline to below $1,200 and silver fall even more in percentage terms to below $14 at one brief stage. The GSR, which measures the number of ounces of silver that are priced equivalent to one ounce of gold, contrary to our suggestion, has risen to around the 85 mark. That is the highest level for around 25 years. And contrary to many other measures higher is not better here - at least not as far as silver is concerned.

"Yet we think that current precious metals price levels not only represent a great buying opportunity for gold, but an even greater one for silver. The metal has, in our opinion, been hugely oversold and as a very small market in dollar terms has been manipulated down by some of the bullion banks who have been consistently selling it short to suit their own market activities.

"But in the past week or so some of the bullion banks, which had been holding short positions, have gone long in silver and in our view that could well be the precursor of a big move upwards in the metal price. They are also going long gold too and if this forces the gold price upwards, perhaps substantially, then this could also help see silver up sharply as well - it tends to perform better than gold in a rising precious metals market which, in turn, brings the GSR down.

"Thus should gold return to the $1,300 mark by the year end - a level which we see as likely - and the GSR come down to say 75 - then this would put silver at $17.33, a rise of well over 20% from where it sits today. Were gold to rise to $1,400 and the GSR to fall back to 70, then the silver price would be back up to $20 and those bullion banks long in silver, or which had accumulated large silver holdings during the metal's period of weakness, would be raking in huge profits, which may be what the recent activity in the precious metals markets is all about. There are certainly analysts and commentators out there who feel that this is a scenario which is likely to play out in the near to medium term...

"Meanwhile the mighty dollar has been slipping a little too, but whether this will be maintained remains uncertain with the potential global trade war initiated by the Trump Administration currently contributing to recent dollar strength...

"Trade wars of this type tend to benefit no-one and once they start to impact the U.S. economy too, in terms of higher prices and rising inflation, then the supposed cure for the U.S. trade imbalance could well prove to be more damaging than the continuing maintenance of the status quo. Combined with a Fed which seems determined to continue to tighten by raising interest rates we could see a U.S. recession emerging by the year-end - and with other countries also affected by the U.S. tariff impositions we could start to see a significant global turndown. Precious metals like gold and silver may be caught in the initial crossfire, but as in 2008 could recover rapidly and go from strength to strength, leaving equities behind for quite a time. With the 10th Anniversary of the Lehman collapse at the end of last week, markets are looking a little nervous with some other potential even bigger players seemingly on the edge. Time for caution!" ("Opportunity knocks for silver as GSR hits 25 year high," Lawrie Williams, Sharps Pixley, 09/18/18.)

Dollar Traders See the Fed's Next Rate Hike as a Big Sell Signal - Nguyen

Analysts see a turning point with the U.S. dollar weakening with hiked interest rates and driven markets.

"When a nation's central bank raises interest rates, it's often a bullish sign for the currency. Not so in the U.S., where expectations for a Federal Reserve rate hike next week are flashing sell signals for the dollar.

"BNP Paribas Asset Management says the broad greenback could plunge 10 percent in the next six to nine months, while Invesco Ltd. forecasts it'll sink about 2 percent against the euro by year-end. Both firms are watching the Fed's Sept. 26 decision for any comments on the impact of escalating trade tensions. The two companies also see the currency sliding as other central banks inch closer to monetary tightening.

"'We have a turning point where the dollar is going to weaken' said Momtchil Pojarliev, deputy head of the currencies team at BNP Paribas Asset Management, which manages $653 billion. The dollar is 'at the maximum positive point' and could weaken to $1.25 per euro in the next six to nine months from around $1.1770 Thursday. It's also a good time to short the U.S. currency against the yen, Pojarliev said.

"The market views a 25 basis point Fed rate hike next week as a near certainty, based on fed fund futures. Contracts on Thursday showed more than 45 basis points of total tightening by the end of 2018. Focus is increasingly shifting to the outlook for next year, with investors moving closer to the central bank's projected path of three rate hikes for 2019.

"That won't be enough to prop up the greenback, according to Noelle Corum, an Atlanta-based portfolio manager in Invesco Ltd.'s fixed-income group. As global growth improves and market participants start to speculate about policy changes from the European Central Bank and Bank of Japan, the dollar's support from Fed hikes and trade tensions will wear off, she said.

"'Going into year-end, we would expect fundamentals will begin to drive markets again, and this will drive the dollar weaker,' said Corum, whose group manages $235 billion. She forecasts the greenback will depreciate to $1.20 per euro and weaken to 104 yen per dollar by year-end.

"The U.S. currency has risen about 5 percent since mid-April, bolstered by a robust economy, gradual tightening by the Fed and haven flows as investors sought refuge from escalating trade tensions...

"As the dollar started to gain steam this year, speculators piled into bullish bets. Long-dollar wagers are now the third-most crowded trade in financial markets, according to fund managers surveyed by Bank of America Merrill Lynch Global Research. And yet, prominent investors including Ray Dalio, who founded the world's biggest hedge fund at Bridgewater Associates, and Jeffrey Gundlach, chief investment officer at DoubleLine Capital, are turning bearish alongside some Wall Street strategists.

"The Fed needs to be taken in the context of other themes like trade," said Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank. "The market anticipates a hike and there is more room to fade the USD as positioning looks well-populated." ("Dollar Traders See the Fed's Next Rate Hike as a Big Sell Signal," Lananh Nguyen, Bloomberg, 09/19/18, updated 09/20/18.)