Gold Prices are Rising Elsewhere than in the U.S. – Why?
This week gold dipped under $1,200. Silver took a hit this week too. It dropped under $15, keeping the gold-silver ratio high. It was able to clamber back some gains by Friday and close up $10, but many investors are favoring treasuries as a safe haven right now. However as metals prices are meeting resistance here, overseas gold prices are still holding value. For example, in Turkey as the lira threatens collapse, gold is trading up 30%. Turkish president Erdogan as recently as last year was even suggesting his people buy gold. Now Turkey is looking at it as a possible lifeline. (As a side note, it the ancient kingdom of Lydia, now modern day Turkey, where gold coinage first originated). A few months ago as well in Europe, gold posted higher gains in the euro over political uncertainty in Italy, Spain, and Germany. Additionally, the central banks of Russia and China continue to be the world’s biggest buyers.
What this means for investors: The dollar is remaining resilient for now, which is hammering gold. In fact it’s so strong right now that safe haven gold buying is not happening despite global uncertainty. Currencies like the lira and other emerging market currencies are plunging though, keeping the uncertainty trade in gold in those places robust. Silver’s pull back offered an attractive buying opportunity as it has been throwing indicators that it is undervalued.
Is Gold Ever Going to Fight Back Against the Dollar?
With gold at an 18 month low and the dollar at a 13 month high, it doesn’t seem like gold can catch a break anymore. The U.S. economy is certainly the bulwark holding up the global economy right now, so investors are comfortable keeping the dollar as a safety net. Analysts – and even the President – have been cautioning that the dollar is getting too strong. However the pressure has yet to be released.
What this means for investors: Debt is still a huge factor to weigh in for the dollar down the line. U.S. debt has tripled since 2007 and is projected to hit $1 trillion by 2020. President Trump’s tax cuts are not being offset by decreased government spending. Rather, spending is increasing (as it has for years), meaning the debt will balloon even faster. The debt level is already unsustainable. When it comes to ahead, you can bet the dollar is going to break.
Case for Gold
There are still indicators making a case for gold, despite the pull back of recent weeks. Even internet entrepreneur Kim Dot Com (best known for his file sharing websites) has started advocating for buying gold before the dollar crashes. Gold, after all, is ultimately insurance against downturn and uncertainty.
Tariffs on Turkish goods and a rapidly plunging lira could have a ripple effect on European banks. The increasingly hostile rhetoric between Turkey and the U.S. will ramp up uncertainty as well. Gold prices in Turkey rose 30% as the currency started collapsing.
Gold is selling for under production cost right now. This is partly due to lack of discovery of new gold deposits in the ground. The global supply is depleting. Once the production costs begin to catch up though while gold prices remain low, it won’t be worthwhile to produce as much. As production falls, prices will start to go up.
Gold to Bottom Out Soon
Once gold bottoms, it has nowhere to go but up. Analysts at ABN Amro think it is close to the bottom now. Metals prices have been falling for sometime now, but Q3 looks like it could be the bottom. ABN Amro has positioned for gold to reach $1,400 by 2019.
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.