by Naeem Aslam
The gold price, which has risen by almost 11.4 percent so far this year, is shining again. Most of these gains have only occurred recently, but the price of gold began to rise on 30th of May. Since then, the price has risen by almost 12.87 percent. It is the largest monthly gain of 9.49 percent since February 2016.
This is mainly due to the following factors:
- Weak global economic growth
- Uncertainties due to geopolitics
- Massive change in the Fed’s monetary policy strategy
Gold price, dollar – and the Fed
Let’s start with monetary policy: the dollar index will record the largest monthly loss since 2018. The dollar index (DXY) fell by almost -1.85 percent this month, and this weakness in the dollar index triggered the bull rally for gold. Investors were concerned that the US economy might fall into recession, and economic data began to support this argument to some extent. More recently, the Fed has admitted that the trade war between the US and China has begun to affect the country’s economic health. As a result, the Fed has decided that it must change its monetary policy.
What is fairly valued in the market (in terms of the dollar index and gold price) is that the Fed will lower the interest rate by 25 basis points. Speculators are unwilling to believe this. They believe the Fed should cut interest rates by at least 50 basis points. Four days ago, in our analysis when the price was trading below $1350, we discussed that the price was likely to rise above $1,400 due to the change in the Fed’s monetary policy path. Since then, the price has risen by more than 7.29 percent to $1,430.
Geopolitical uncertainty helps gold price
Another reason for the rise in the gold price is the increased geopolitical uncertainty in the Middle East. According to Iranian officials, the recent conflict with the shooting down of the US drone (on Iranian territory?) has aggravated tensions between the US and Iran.
For the first time the Trump administration has adopted a more sensible approach, using sanctions instead of military action against Iran. Nevertheless, it should not be said that this has not aggravated the situation in the most sensitive region of the world. Iran, for its part, has said that the door is closed to all diplomatic channels – and that means that insecurity continues to rise. This is likely to drive the gold price higher and the gold price may slightly exceed the $1,500 level
An important factor for investors to look out for is the relationship between the price of gold and the level of negative yields on government bonds. The following chart shows that there is a strong correlation, meaning that the price of gold rises when Bonds increase having negative returns. Gold is a safe haven here. Given the current monetary policy of the European Central Bank and the Federal Reserve Bank, it is likely that the gold price could actually reach 1550 in the coming months.
However, it is important to keep in mind that the standard figures are still quite under control. I.e. quite low, which means that the economic situation is not really bad. In addition, the earnings season is also just around the corner and any significant weakness in the dollar index should help the company’s profits.
In conclusion, the upcoming G-20 summit, the Fed’s monetary policy, the trade war between the US and China and increased geopolitical uncertainty in the Middle East could further support gold. For now, the way is free for rising gold prices!