Remember, way back in the day, when the Fed was certain about a rate hike in June? It was a heady time, almost three weeks ago… As we rushed headlong into the recovery that would not be denied, the price of gold started to modulate a bit from its highs after a blowout first quarter (not a blowout first quarter for the stock market, that’s for sure). Talk of an imminent rate increase sent the dollar higher, putting downward pressure on gold and silver and making naysayers feel pretty good about themselves…while gold experts nodded and waited. Then last Friday’s job report hit, like a deer across the windshield.
Now it’s a new week, with a raft of economic news, most of it not good, unless you’ve already stocked up on hard assets. The jobs report has rattled interest rate hawks on the Fed, but other global forces were at work when it came to bullion prices. The game of three-card monte that is our U.S. economy is just one factor among many working for gold prices going forward.
Profit Taking Plus an Impending Rate Hike
One of the ironies of Friday’s face-plant was there was already evidence the recent anticipatory decline in gold prices, which hit as the Fed started to feel more confident of a rate hike, was overdone. It’s likely a quarter-point interest rate bump had already been priced into gold for weeks. The effect of the Fed’s talk was magnified by profit-taking from gold’s huge first quarter surge, creating a situation where gold was oversold. But when Friday’s jobs report dropped like a bomb that was all the incentive traders needed for a wake-up rally in gold prices.
Demand Down in India? Shocking!
Beyond Fed rate hike fears, another factor cited as bearish for the yellow metal was diminished global demand, specifically in, of all places, gold-loving India. But being surprised that global demand dips during the summer due to slackened buying in India is like being astounded to see geese migrating north in the spring. Indian demand abates at this time every single year. That’s because their holiday season is in late summer and early fall, which is when Indians go on a gold-buying super binge they’ve been saving up for all summer. India’s also been dealing with a jewelers’ strike that’s only recently been settled. We see this pattern over and over – yet somehow we non-Indians forget this annual cycle with equal regularity.
China’s Voracious Desire for Gold
China’s centrally run economy has a huge appetite for the yellow metal. How big? No one can say for sure, but the degree of their obsession is becoming obvious, as China’s ICBC Standard, one of the world’s largest banks in terms of assets, recently purchased its own bullion vault from Barclays in London. Some think China’s planning to issue a gold-backed global currency, but it’s more likely they’re simply planning to use gold reserves to prop up the yuan. This focus on gold also means China sees bullion as a more reliable support for the yuan than U.S. Treasury bonds.
That said, I think worries the Chinese are planning to undermine the dollar on world markets are overblown. China’s already struggling with its own slowing economy, why pick this time to wound one of its largest customers—particularly in an election year when Americans are already cheesed off about the trade deals they get? Right now the Chinese aren’t trying to sink the dollar (at least not yet); they’re trying to emulate it. China is using its ever-increasing stockpile of gold to back the yuan as a global reserve currency.
From Obsession to Recession?
Gone are the days when the sun rises and sets over the U.S. economy. Today, for better or worse, we all move in a globally connected economy. When it started looking like our Fed was going to hold off on interest rates, Japan’s Nikkei stock market crashed and the yen surged against the dollar. The central bank of Japan is already experimenting with negative interest rates in an effort to get people to spend money rather than save it, and to push banks to lend out more cash. But so far it’s not working. The more Japan works to undermine its own currency and cash savings, the more physical gold will attract those trying to hedge the buying power of the yen. Fear of a crumbling economy doesn’t send most people to the mall.
This failed negative interest rate strategy, and the average Japanese citizen’s alarmed response to it, should serve to remind us how crucial it is to maintain investments in liquid hard assets when faced with a challenging global economy. Sure, the U.S. is still an economic superpower, but today we’re just one of many. As the global race to the bottom on currency valuations continues, gold is becoming an increasingly critical part of the global economy. If there’s one thing we can learn from Chinese leaders, it’s an understanding of gold’s value; definitely not a bad thing.