Gold to Touch $1600
By Naeem Aslam | Originally published April 3, 2018
Gold traders really needed a support from the Fed and yesterday the Federal Reserve Bank said what many wanted to hear; there is no change in their monetary policy stance. The significance of the Fed statement was in the phrase where the Fed emphasized that they are not going to deviate from their gradual rate hike path. This particular statement pushed the dollar index lower and we saw a higher move in the gold price yesterday. However, I am a bit skeptical about this move, because I do think that the Fed is close enough to achieve their inflation target and it would put more pressure on the Fed to adopt a little more hawkish stance.
A 12.5-kilogram gold bullion bar sits at the Valcambi SA precious metal refinery in Balerna, Switzerland, on Monday, April 24, 2018. Gold’s haven qualities have come back in focus this year as President Donald Trump’s administration picks a series of trade fights with friends and foes, and investors fret about equity market wobbles that started on Wall Street and echoed around the world. Photographer: Stefan Wermuth/Bloomberg
Gold is an interesting commodity, it acts like a safe haven when there is too much fear in the market, especially geopolitical concerns. I will touch on these in a lot more detail in a bit. But if we remove the safe haven component out of the gold equation (the equation for me has three key elements; inflation hedge + safe haven + dollar effect), the price of gold would be very different from where it is now. The Fed is by no measure dovish. I mean they are done with their quantitative easing program, they are winding down their balance sheet and on top of that, they are also increasing the interest rate. How can one claim the Fed has a dovish stance?
So, removing the geopolitical component from the equation, I think the true value of Gold must be circa $1150 or even below the $1K mark. Remember those days when the Fed started to talk about winding down their QE? We saw a massive sell-off in the gold price and we touched the levels which I mentioned before. What is the monetary policy stance since then? Has it gone more dovish or hawkish? Of course, hawkish!
Hence, it is safe to say that the dollar effect isn’t that strong, but the correlation is there, and it is a strong one. If the Fed even adopts a more hawkish stance, I do not think it is going to crush the gold price anytime soon.
The gold-oil ratio tells us that a bull run could be on the cards for gold.
It must be the geopolitical concerns which are keeping the gold price higher despite the fact that Trump has been officially nominated for Noble Peace Prize by House Republicans. Sorry, Trump. I think the situation in the Middle East is of grave concern. Israel has ranched up the tensions with Iran and the geopolitical triangle; Iran, Russia, Turkey, Qatar and China one side and Israel, Saudi Arabia, US and its Allies on another side, has the potential to create a World War III. In this context, any pullback in the gold price is a perfect opportunity to buy.
Another reason that I am bullish on gold is the gold-oil ratio (the ratio of the price of gold per ounce over the price of oil per barrel) and its move towards it mean. If history repeats itself, then we are about to see some serious explosive move in gold. Back in December 2016, it was near 20 and the subsequent move in the price pushed was from $1127 to $1350. The same ratio is trading at 19 now, a level not seen since June 2015. Now, again, if history comes into play (or if oil prices face a major correction), I am expecting the gold price to move all the move to 1600 by the end of this year.