Gold has fallen into a sleep since the middle of May. So far this year, the precious metal has been consolidating, as it has flatlined near the $ 1,300 level. But there are certain factors that are pointing that things are about to change for the commodity. May be the sleeping giant will wake from this slumber.
We believe the lack of direction is the lull before the storm. In my last article, I pointed that gold speculators are at record short, even though we are not seeing any selling pressure in the price of gold. Now, last week’s COT report showed that commercial category of traders, which includes miners, jewellers, producers and merchants, have covered their short position by 30,000 contracts. Now, this is interesting, as there was no real action in the price of gold last week.
First factor: Rise in inflation
The inflation is rising in the US and other global economies. Crude oil is the primary factor which is driving the inflation up. Copper is also trending along nicely on the upside. The base metal is the leading indicators, which diagnoses the health of a global economy.
As seen from the chart, copper is trading above the rising multi -year trendline since 2017. It has broken the resistance of downtrendline taken from the start of 2018.
The five-year real yield is at 0.74 per cent, as seen from the chart, and is constantly rising. This is the indication that inflation expectations are rising and five-year TIPS (Inflation protected securities) are getting more expensive versus a nominal treasury.
(Source: Board of Governors of the Federal Reserve System)
Second factor: Trade wars
The US President Donald Trump is hell bent on protecting the American interest and rolling out tariffs as weapons to renegotiate existing trade agreements with partners around the world. The potential of trade war is increasing and now the US is taking on the G7. It is already at the loggerheads with China, and is now ruffling the feathers of its allies — Canada, Mexico and the European Union.
In response, retaliations have started against agri producers in the US. We may see tit-for-tat from other countries, which will eventually lead to the trade war and distort prices around the world (again which will increase inflation).
Third factor: US’ mounting debt
The United States had a Federal Budget deficit of $ 146.8 billion in May, which brings the total over the trailing eight months of the 2018 fiscal year to $ 532.2 billion. The deficit is not expected to shrink, as trade wars will put cap on the US exports (Other countries are on the way to implement trade tariffs against US).
The recent tax cuts and increase in spending is expected to stretch the deficit. The Congressional Budget office’s recent projection points to increasing deficit over 10 yeara.
(Source: Congressional Budget Office, Zero Hedge)
International sentiment has already started to turn against the US Dollar. Russia, China, Turkey and other emerging markets have started accumulating physical gold. At present, gold is the only assets where financial managers are not bullish. Equity class even debt class such as bonds are doing quite well despite increasing interest rate.
We would like to take contrarian call as at some point investors will start realising the true value of gold based on demand and supply and not suppressed by derivatives.
(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Readers are advised to consult their financial advisers before taking any position based on these observations)