The price of gold gained 4 per cent last month before rising to a high of US$3,650 early Friday.Heinz-Peter Bader/Reuters
This year’s meteoric gold rally has been driven by war, lingering inflationary pressures, erratic U.S. trade policies and President Donald Trump’s attacks on Federal Reserve independence, making the metal a winning hedge against a world turned upside down.
Gold investors now need to brace themselves for what comes next: zzzzz.
That’s right, the underpinnings for gold’s next move could be far less dramatic than the headline-grabbing events that sent investors scrambling for the perceived safety of bullion over the past year.
The next phase of the rally could rest on factors that are far more traditionally aligned with gold, such as expected Fed rate cuts and a weaker U.S. dollar.
Still, if these technical factors drive the price of gold higher from today’s record highs, investors are unlikely to complain.
Gold took off in August, ending four months of zigzagging and emerging as the best-performing U.S. asset class for the month, according to Savita Subramanian, equity and quant strategist at Bank of America.
The price of gold gained 4 per cent last month before rising to a high of US$3,650 early Friday. It outshone investment-grade corporate bonds, the S&P 500 and even the tech-fuelled Nasdaq Composite Index.
Okay, the S&P/TSX Composite Index did a little better than bullion in August, rising 4.8 per cent.
But take a look at what propelled Canada’s benchmark higher over the past month and you’ll see big gold producers such as Kinross Gold Corp., Barrick Mining Corp. and Agnico Eagle Mines Ltd. among the top performers in the index, with solid double-digit gains.
What’s more, TSX-listed gold producers contributed 572 points to the index’s performance last month, according to Bish Koziol, an analyst at RBC Capital Markets.
The contribution was larger than that of banks, even though the five largest gold companies in the index are less than half the size of the five largest banks in terms of the combined value of their shares.
Over the longer term, gold has risen 38 per cent this year. The iShares S&P/TSX Global Gold Index ETF, which tracks the performance of dozens of gold producers, is up 90 per cent.
Investors who have shunned individual gold stocks may have gained significant exposure to the sector simply through broad index-tracking funds.
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Even more broadly, some economists argue that the Canadian dollar is being supported by bullion as Canada’s trade surplus in gold surges, overcoming weaker economic data that would normally skewer the value of the loonie.
“There is no historical precedent for gold exerting such influence over the currency, eclipsing both oil and rates as the primary force behind Canadian dollar moves,” Stefane Marion and Kyle Dahms, economists at National Bank of Canada, said in a note this week.
So what’s next for gold?
The dull case rests on Fed monetary policy. The central bank has hinted that rate cuts are coming, perhaps in a couple of weeks, as the U.S. labour market weakens and economic activity turns softer.
Lower rates reduce the opportunity cost of owning gold, since investors may be less enamoured with lower-yielding cash and short-term securities.
Rate cuts could weigh on the U.S. dollar as well, and a weaker dollar tends to be bullish for bullion.
Citigroup strategists expect that the price of gold can rise to US$3,750 over the near term, based partly on strong investor interest in gold ETFs and rising U.S. stagflation risks – in which economic growth subsides but inflation remains sticky.
The higher target implies another 3-per-cent gain from Friday’s price, which is, well, pretty ho-hum.
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But there are a couple of compelling reasons to stay alert here.
David Rosenberg, the president of Rosenberg Research & Associates, believes gold is in the midst of what he calls a secular bull market, in which sweeping trends underpin demand for gold over the long term.
Central banks, for example, will continue to diversify their foreign exchange reserves by buying more gold, essentially putting a floor under the price.
Another reason to keep an eye on gold: Mr. Trump is showing no signs of controlling his erratic impulses.
That could raise the demand for the metal as a hedge against ugly surprises, such as a steep drop in the value of the U.S. dollar, a tariff-induced economic downturn or a stock market selloff.
“Gold is at a record high at a time when the stock market is also pressing against a record high. Imagine what happens if the risk-on trade morphs into a risk-off trade,” Mr. Rosenberg said in an interview.
He thinks gold is going to US$6,000 at some point in this bull market. Perhaps there’s still some excitement here.