Since the middle of May, gold has fallen into a deep sleep. So far during this year, the precious metal has consolidated and flat-lined near the $1,300 level. However, specific factors point towards a change soon for the commodity. It could be gold may soon wake from its slumber.
It is believed the lack of direction is only leading up to a storm. In one of Aasif Hirani’s recent articles, he mentioned that gold speculators are at a record short, even if there is no selling pressure in the price. Last week’s COT report showed a commercial category of traders including miners, jewelers, producers, and merchants, have covered their position by 30,000 contracts.
First Factor: Rise in Inflation
As the inflation rises in the US and other economies around the globe, crude oil is the primary factor that drives it up. Copper is another that trends along nicely on the upside. The base metal is a leading indicator that diagnoses the health of a global economy.
Copper is trading above the rising multi-year trendline since 2017. From the start of 2018, it has broken the resistance of downtrend line.
The five-year real yield is continually rising and is currently at .74 percent. This yield shows that expectations of inflation are growing and five-year TIPS are getting more expensive versus a nominal treasury.
Second Factor: Trade wars
As President Trump works feverishly to protect American interest, he rolls out tariffs as weapons used in renegotiations with trade agreements already in place with global partners. The risk of trade war is increasing now more than ever especially with the US taking on G7. The Trump administration is already in conflict with China and is currently ruffling feathers of the US’s allies– Mexico, Canada, and the European Union.
Retaliations against Agri producers have started in the US as a response to increasing tariffs. Soon we could be seeing retaliation from other countries that could very quickly lead to a trade war, distorting prices around the world. This process would then aid in the increase of inflation.
Third Factor: Mounting Debt for the US
The Federal Budget of the US is at $146.8 billion as of May. This number brings the total over the trailing eight months of the 2018 fiscal year to $532.2 billion. As trade wars should cap US exports, the deficit is not likely to shrink. Other countries could work to implement trade tariffs against the US.
Recent tax cuts and increased spending could very likely stretch the deficit. The projection from the Congressional Budget Office points to an increased deficit over ten years.
Across the globe, other countries have begun turning against the US Dollar. Among others, China, Russia, and Turkey have started accumulating physical gold. Presently, gold is the only asset where financial managers are not bullish. Equity class or even debt class like bonds are doing well despite increasing interest rates.