Read this article on Marketwatch and viewing this graph on the financial times I thought it was quite interesting. Gold going up on the risk of US government debt default. US government in soo much debt.......even if congress increase debt limit it was spiral further. Trump's 'tax cuts' will push the debt limit out further.
What’s driving jittery investors into the perceived sanctuary of gold? Not a nuclear-armed rogue nation nor increasingly tough talk on trade by U.S. President Donald Trump.
The real driver behind gold’s rally to a nearly one-year is far more pedestrian, though Washington’s fingerprints are on it, argue analysts at Goldman Sachs.
Gold is propped up on the lack of a tax-code rewrite or other perceived pro-growth promises that had sent stocks soaring but the dollar flagging, a to-do list only further challenged by funding Hurricane Harvey relief and avoiding a looming government shutdown.
Such a domestic-focused catalyst exposes highflying gold to a price flip if progress is made, and that leaves the Goldman analysts reaffirming the year-end prediction for gold at $1,250 an ounce, barring much bigger escalation out of the Korean Peninsula.
That target marks no insignificant pullback considering that gold for December delivery GCZ7, -0.03% closed near $1,344 an ounce Tuesday, its highest in nearly a year. It was driven there—if trader chatter and a flurry of analysts notes from Kitco, Commerzbank, TD Securities and others are to be believed—on a quest for cover from geopolitics.
The metal, as measured by front-month futures trading, is up about 16% so far in 2017 and it isn’t just “hedgers” behind the move. Large speculators ramped up their bullish positioning in gold futures to an 11-month high during the most recent reporting period for data collected by the Commodity Futures Trading Commission.
But for gold investors, the market mechanics underlying the frightful headlines should matter more, wrote Goldman analysts led by Jeffrey Currie, in a note.
“It is tempting to blame the rally in gold prices on recent events in North Korea. While these events have helped to create a bid in gold, they only explain [roughly] $15 of the more than $100 [per ounce] rally since mid-July,” said Currie.
Currie and company are willing to stick with their gold call even as Labor Day weekend headlines revealed North Korea’s sixth and significantly larger hydrogen bomb test, which it hailed as a “perfect success.” The isolated regime is said to be ready to launch a new intercontinental ballistic missile as soon as this Saturday when the country celebrates its founding day.
The threat of war on the Korean Peninsula or beyond is serious business, the analysts concede. So serious, in fact, that the financial markets detect—or they should, says Currie—stable equilibrium in which no one side can gain by a unilateral change of strategy if the strategies of the others remain unchanged.
Of course, whether or not Kim Jong Un’s nerves are Cold War cool remains to be seen.
Washington can’t be only Korea obsessed. The unfortunate aftermath of Hurricane Harvey suggests that Washington is going to have to overcome partisan differences, pass spending bills, try harder to avoid a government shutdown and pursue infrastructure projects sooner than later. And it has to accomplish this while Trump appears to pursue his own agenda, often a moving target. It won’t be easy, but the incentive may be there. A separate team of Goldman economists has slashed its calculated probability of a government shutdown to 15% from a prior assessment, itself already lowered, of 35%.
It may have just gotten too easy to pin gold gains on geopolitics. Whether triggered by North Korea or elsewhere, geopolitical risk has a lasting impact on gold only if there is an actual currency debasement as a result, according to Currie.
This is true “especially if the gold price move is much sharper than the move in real rates or the dollar.”
But that hasn’t happened, not yet anyway.
In fact, some data show that the truest “haven” hedge when geopolitics roil financial markets isn’t gold at all. It’s oil.
“It is interesting to note that the oil supply disruptions created by Gulf War I led oil to act as a better hedge than gold, which has been the case during several geopolitical events centered around oil-producing nations,” Currie said.
The surge in gold futures prices this year plays a curious role in the “hedging” debate. That’s because how investors “protect” themselves with the shiny stuff matters, according to the Goldman Sachs team. Stockpiling physical bullion may be the only safety play to avoid a liquidity crunch in the event of a crisis. The best example? The hurt brought on for gold futures investors during the 2008 collapse of Lehman Bros.
”After this liquidity event, investors became more conscious of the physical vs. futures market distinction and began to demand more physical gold or physically backed ETFs as a hedge against black swan events,” the Goldman team write.
“The lesson learned was that if gold liquidity dries up along with the broader market’s, so does your hedge—unless it is physical gold in a vault, the true ‘hedge of last resort.’”
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