Trump opens Pandora’s box. Global trade war very positive for gold.

Article first published on Sharps Pixley website

Well we’ll soon see if President Trump’s imposition of steel and aluminium tariffs on the EU, Canada and Mexico is for real – or just another negotiating tactic.  He is very much a believer in promising the worst as a tactic for generating concessions in his business dealings, but will this work in global geopolitics?  Tit for tat tariffs are already being promised by those affected – they can play at that game too! – and if they all come about they could cost far more in American jobs than any possible regeneration that might be seen in the U.S. steel and aluminium sectors.  Those are too far down the line of closures and write-offs to see any kind of short term recovery.  And U.S. manufacturers currently relying on imported aluminium and steel for their products will see costs rise which, no doubt, will see them having to increase prices for their goods making them less competitive in both domestic and global markets.

And, of course, such a trade tariff war could easily escalate dragging in more products and countries.  A global trade war does nobody any good as noted by top economist Martin Murenbeeld (www.murenbeeld.com) in his latest weekly Gold Monitor newsletter for his subscribers.

Martin is renowned for his comprehensive, but conservative, analyses of the gold market.  As we have noted before he is mildly bullish, but circumspect, on his stated outlook for precious metals.  He is not a predictor of a rapid rise to a $5,000 or $10,000 metal price but, in our view is a much more realistic observer of metal price trends in looking for steadily rising medium to long term price levels in line with a perhaps weakening dollar index.

As he states: “a global trade war would be catastrophic for the world economy – and would be a big issue for the gold market! A global trade war would seriously alter central bank policies – more loosening/less tightening – which is a plus for gold! And the dollar’s reserve-currency role would be damaged, and accelerate the move to a multiple reserve-currency world (with the dollar playing a much-reduced role).   Central bank gold reserves around the world would likely rise accordingly.”  If he is correct in his analysis and President Trump does not reverse course, the global economy could be in for some very uncomfortable years as /a tariff war stutters and possibly escalates.

What is puzzling about the Trump tariffs so far is the countries which have been targeted – all supposedly allies of the U.S. – while China, which most see as the biggest culprit in terms of what are seen as unfair trade practices, seems to be attracting less immediate attention, although talks with the Chinese are ongoing.  However, one suspects that China, and some other Asian nations will become targets too and again tit-for-tat  tariff increases will result with damaging results for the sectors so chosen.  While President Trump has described the tariff increases as a national security issue given steel and aluminium are used in weapons manufacture, others see the moves as pure protectionism of the worst kind.  Such trading issues usually end up as economically disadvantageous to all parties – hence the likely benefits to the gold market as investors look to so-called safe havens.

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2018 gold price forecasts – Murenbeeld and World Gold Council

Lightly edited version of another of my articles published yesterday on sharpspixley.com

We recently published an article which drew quite heavily on research by Canada’s Murenbeeld & Co regarding headwinds ahead for gold – click on Gold facing severe headwinds despite overvalued dollar – Murenbeeld to read or re-read – and one suspects that Dr. Murenbeeld reached these conclusions in his research for his annual gold price predictions for the year ahead.  These conclusions are usually the highlights of his early-year presentations at various events around the world.

His new predictions for 2018 have just been published for subscribers to his economic service -see:www.murenbeeld.com – and as usual he presents three price scenarios for gold looking ahead to which he gives various weightings and uses these weighted averages (for worst, base and optimistic cases) to draw an almost final quarter by quarter gold price conclusion for the year ahead.  But he again adjusts these figures further to take into account possible external geo-political events which are not considered in his initial price scenarios.  The forecasts are all generally conservative and sometimes his overall predictions come close to eventuality.  Other times they fall short on the positive or negative side, but seldom are they out by any significant amount.

Thus Dr. Murenbeeld’s 2018 predictions, if they come about, will disappoint the gold bulls, but also confound the gold bears.  He is very much on the middle path, although he thinks his more positive scenario is the one which should be followed by the world’s central bankers, but only gives this a 25% likelihood weighting.

His weighted predictions for the gold price averages for 2018 are as follows (taking into account his geopolitical event adjustments):

Q1: $1,281,   Q2: $1,301,  Q3: $1,329,  Q4: $1,347.  However he does say in his commentary that he would not be surprised if at some point during the year the $1,400 level might be breached intra-day, but obviously doesn’t anticipate that this level is sustainable.  Looking beyond 2018 he also predicts gold averaging $1,351 in Q1 2019 and continuing to rise further to $1,368 in 2019 Q2.  Bear in mind that these are all average prices and they thus could encompass some sharp fluctuations above and below the specified levels.  As an example, in 2017 gold prices have fluctuated between around $1,149 and $1,351 with an average price of only $1,206 year to date.

Meanwhile the World Gold Council (www.gold.org) has just published its latest Gold Investor publication in which its chief strategist, John Reade, is also optimistic on gold’s likely performance in 2018.  He cites global monetary policy, a possible fall in the US dollar index, a switch from overpriced equities into precious metals, demand growth in China, India and other gold supportive markets like Germany, all as likely positives for gold.  He makes no price forecasts  but anticipates the gold price continuing to grow in the year ahead, but again at a pretty conservative rate.

Neither of these stated reports suggest an on-fire gold price next year, but both are at least conservatively positive.  Deep down we suspect things could move a little faster and gold end the year at $1,400 plus but that very much relies on those holders of the big shorts on the COMEX futures market allowing prices to rise faster than they have been allowed to in the current year and a turnaround in precious metals investment – in bullion in particular in the North American markets.  Gold demand there may be dwarfed by that in the East, and even in Europe, but the U.S. markeyts in particular still seem to be setting the gold price.  We hope for better things but aren’t holding our breath in anticipation.

 

Does China have 30,000 tonnes of gold stashed away?

A highly respected analyst quotes research suggesting that China built up a huge stash of gold between 1979 and 2003, and has been adding to it recently – and all without declaring this to the IMF.

Lawrence Williams

A note from very well respected analyst and China watcher, Simon Hunt*, has come up with the intriguing suggestion that China may actually have as much as 30,000 tonnes of gold hidden away in various accounts rather than the 1,054.6 tonnes it declares to the IMF.  It is widely believed that China has indeed been accumulating additional gold for its reserves secretly over the last few years, but Hunt’s note also cites research by Alasdair Macleod of Gold Money published last year that China has accumulated some 25,000 tonnes of gold when the gold price was very low between 1983 and 2002.  Hunt rates Macleod’s research very highly, referring to him as the world’s top gold analyst.

Hunt goes on to state that China is planning to link its currency to gold within the next three years, but first will have to make some swingeing internal financial reforms which will have a strong impact on global financial markets – and not a positive impact!

He also comments that his dealings with the Chinese suggest that the country does not wish the yuan to become THE or A global reserve currency, but just wishes to be able to trade directly in yuan rather than via a dollar route – a process which is already under way as it has set up bilateral trade deals in yuan  with around 28 countries already and has established a trading hub in Zurich.

I’ve gone into this in a bit more detail in an article published on Mineweb.com – See: Could China actually have 30,000 tonnes of gold in reserves?.

This suggestion may seem a bit far fetched, but China has a penchant for ultra long term planning as a centrally planned economy, and certainly had the wherewithal, and perhaps the incentive, to achieve this given its huge trade surpluses and a desire to be less reliant on what it has seen as a vulnerable  U.S. dollar in its foreign currency reserves.

As an added note though, well known gold analyst Martin Murenbeeld reckons these huge stock figures should perhaps just be classified as wild estimates.  He says the question that needs to be asked is where the supply might have come from?  “Did GFMS, CPM, etc all miss the supply side – assuming the 30,000 tonne demand stockpile is correct?” he says.  “In short, the data tabulators didn’t just miss the demand side of the market, they also missed the supply side. How likely is that?”

*Simon Hunt has been in the commodity analysis business for many years.  He was one of the two founders of hugely respected metals commodities consultancy Brook Hunt which nowadays has been absorbed into Wood Mackenzie and nowadays runs his own commodities advisory service in Simon Hunt Strategic Services – www.shss.com