2017-08-10 / Business News

MONEY & INVESTING

Geopolitics, Trump’s economic plans could affect the price of gold

This has been an exciting year for investing in almost all asset classes and securities except one — gold. In fact, the price of the precious metal has been downright boring for the last eight months. In January, gold was trading at around $1,200 per ounce and then rose to $1,300. In the next few months, it fell back down to $1,200. Then it rose to $1,300. Then it dropped to $1,200. Now it is increasing back to $1,300. Why has gold vacillated in such a tight range? Will it ever break out?

In the past year, the bullish and bearish forces affecting gold prices have been roughly in balance. On the bearish side, the economy has been fairly robust. Jobs are being created and GDP has been positive. This would typically depress gold prices, as investors have other areas to gain a higher return than in gold.

Counter to this, inflation has been almost non-existent in the U.S. Consumer goods and wage inflation have not risen as one would expect in a strong economic period of growth. Low inflation is generally positive for gold prices. Investors that hold the commodity won’t lose ground as prices rise, given that gold does not produce interest or dividend income.

An equally bullish and bearish factor on gold recently has news from Washington, D.C. The chaotic Trump presidency has been bullish in that analysts are worried that important economic drivers like tax reform and infrastructure spending will be sidelined, and the economy will suffer as a result. In addition, worry over an impasse on the debt ceiling has made the safe haven of gold more popular and the dollar weaker.

On the bearish side, the Fed has been promising to slowly sell off its massive bond portfolio in recent months. This should push interest rates higher, depressing gold prices as the opportunity costs of holding gold versus fixed income investments rise.

Given these opposing forces, it should be no surprise that gold has not been able to gain traction in any direction for any extended length of time. But there are some wild cards that may tilt the balance in the near future.

First, there are geopolitical risks that are becoming more pronounced — such as possible military action in North Korea or problems in the Middle East. Should any of these worrisome factors come to reality, gold will certainly rise as investors look to a safe haven for their funds.

In contrast, if the Trump administration were to pass tax reforms or an infrastructure plan, that would put downward pressure on precious metal prices. Similarly, if the Fed actively starts to unwind its balance sheet or raise rates more aggressively than analysts predict because of a strong economy or higher inflation numbers, that would also depress gold prices.

A final force that may tip the scales of gold prices may be physical demand for precious metals. Right now, the demand for gold is low in places like India and China. If their economies improve, that can turn around quickly.

I would expect gold and other precious metals to maintain their tight trading range for the time being. But given the unpredictability of Washington politics and geopolitical events, it may only be a matter of time before gold takes us for a wild ride once again. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

Return to top