The performance of gold bullion and its respective ETF the SPDR Gold Trust (GLD, Financial) in 2018 is best described as tepid. Fortunately for gold bugs, the price of this precious metal has stabilized in 2018, as is evident from the 30-day performance (+ $30.70 or 2.33%), and its six-month performance (+ $67.60 or 5.28%).
At the time of writing, gold was trading a smidgen under the critical $1,350 level, in a relatively tight range between $1,320 and $1,355. That represents a mere 2.65% variance from the base figure.
In fact, a graphic of the gold price is reflective of significant gains from the low it encountered on Dec. 12, 2017, when gold was trading at $1,238.50 per ounce. Since then, it has enjoyed a virtually uninterrupted bull run, hitting a high of $1,362.40 per ounce on Jan. 25, 2018, before retreating to its current level.
The six-month performance of gold indicates strong consolidation above the $1,300 per ounce level, while SPDR Gold Trust ETF has been hovering just below the $130 price level. However, it is important to understand what factors are driving stability in gold markets.
Chart via GuruFocus
2018 risk factors for precious metals like gold
As always, the driving force behind gold price volatility is geopolitical uncertainty. Every time a chemical weapons attack purportedly takes place in Syria, or elsewhere, and the U.S., U.K. and France respond, gold reacts. In fact, bellicose rhetoric from the allies and Russia’s response will always play into the hands of gold bugs. Since gold is a safe-haven asset that traders and investors flock to every time there is extreme volatility in the financial markets, it is always a safe bet when the sirens are sounding.
Wilkins Finance commodities trading specialist, Nathan Hawthorne says:
"Gold acts like the Japanese Yen in many regards. The JPY is the preferred currency of Asian traders and investors whenever negative news hits the markets from China. Recall the mass selloff that took place in the Shanghai and Shenzhen markets a few years back. Both gold and the JPY act as a hedge against uncertainty. Geopolitical risks are evident across the spectrum, and include the prospect of trade wars, actual wars, elections, and disruptions to supply chains."
Technological shifts or advancements can also result in an increase or decrease in the demand for gold. It’s important to point out that other commodities like crude oil can also place pressures on the economy and result in a fluctuating gold price. When the price of crude oil is too low, it has a contractionary effect on economic activity since it is one of the main drivers of inflation. However, when the price of crude oil is too high, it acts as a disincentive to travel and tourism and overall business activity since it raises costs for manufacturers and producers and ultimately the consumer. Gold typically reacts to crude oil price volatility.
Trump, oil, foreign countries and gold
One of the major drivers of the gold price is the U.S. dollar. As the world’s reserve currency, the greenback plays a big part in gold demand. There is a clear correlation between demand for gold and the price of gold. As the price increases (through the exchange rate mechanism with other currencies), demand for gold decreases.
This is precisely why a strong dollar is a disincentive to gold mining companies like Barrick Gold Corp (ABX, Financial), Royal Gold Inc. (RGLD, Financial) and Franco-Nevada Corp (FNV, Financial), among others, which are currently riding the stability of the gold price. Foreign buyers of the precious metal will have to pay more per unit of their currency for each ounce of gold when the dollar is appreciating.
The Trump factor has been cited as one of the drivers of the gold price over the last 15 months, although it was pyrrhic in nature. Initially, investors were concerned that Trump would go hard against China, tear up NAFTA, and disrupt all relations with Mexico, among others. We saw the price of gold spike before Trump’s election, and again after stock markets cooled towards the end of 2017. These are natural investor reactions to political events and uncertainty.
Fortunately, gold demand remains robust what with countries like India, Russia and China responsible for much of what happens to the gold price. U.S. politics aside, gold remains the desired precious metal that it always has been.
Disclosure: I have no position in securities mentioned in the article.
