It’s the kind of rally gold bugs everywhere have been silently hoping for-- but one that has looked increasingly unlikely amidst an overly brawny greenback. They have finally gotten their wish thanks to a perfect storm of dovish central banks, a weakening dollar and ever-rising geopolitical tensions.
Gold prices appear headed for a fifth straight session of gains on Monday as they continue taking out multi-year highs.
Spot gold came within a hair’s breadth of Friday’s multi-year high of $1,410.78 an ounce in Monday’s intraday trading-- a level they last touched in September 2013. Meanwhile, U.S. gold futures climbed nearly 1 percent to $1,412.70 an ounce.
Gold prices have climbed more than $70 an ounce over the past week and are up nearly eight percent so far this month.
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Last week, the U.S. Federal Reserve and the ECB hinted that they were open to easing policy amidst a backdrop of a slowing global economy and escalating trade tensions.
Rising geopolitical tensions between the U.S. and Iran have certainly been helping gold’s case. Last week, Iran hit back at U.S.’ “maximum pressure” campaign by downing a sophisticated unmanned U.S. drone using its own “3rd Khordad” system that is supposed to replicate the S-300’s capabilities. This prompted President Trump to order an airstrike on Tehran before shortly recalling the mission.
Although on Sunday the president reiterated his unwillingness to go to war with Iran, tensions remain high between the two long-time foes with Washington set to announce significant sanctions against Tehran on Monday. Trump’s latest tweets on the matter has not been helping much either as it seems to imply that a future strike remains on the table.
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Helping the gold rally is a weakening dollar, thanks to a dovish outlook by leading central banks. The dollar tumbled to a three-month low against a basket of leading currencies as traders bet that the Fed could start cutting interest rates as early as next month.
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Hedge funds and money managers have boosted their bullish bets in COMEX gold while speculators have also switched to a net long in silver futures and options.
The action in the silver market though has been less pronounced than for gold, with silver edging up just 0.1 percent on Monday to trade at $15.37 per ounce. Silver seems to be facing plenty of resistance around the $15.50 level and it remains to be seen whether it will finally be able to crack that level.
Other metals have benefitted from the gold rally, with platinum up 1.1 percent at $815 an ounce while palladium rose 0.9 percent to $1,516.02 an ounce.
Can the rally continue?
Gold punters have suffered through countless sucker rallies ever since the last bull market ended eight years ago. Naturally, they will be hoping that the latest rally does not turn into the biggest sucker of them all.
Luckily, that does not seem very likely.
Related: Could China Start Dumping U.S. Treasury Bonds?
There’s a fair chance that prices might correct somewhat if President Trump and his Chinese counterpart Xi are able to come to some sort of agreement when they meet at the G20 leaders summit in Japan this week. However, this one might end serving up more of the same with little clarity on how serious differences in expectations on both sides are going to be addressed.
Over the short-term, the scepter of a full blown war between the U.S. and Iran will continue being the most important catalyst for gold prices.
In a string of four morning tweets, Trump revealed the only reason he called off military action for the shoot-down of a Navy drone is because he was concerned that it would lead to the death of 150 Iranian citizens, a disproportionate response for downing the unmanned drone. Obviously, doing so would only help Iran play the victim trump card in a bid to gain international sympathy. But with a defiant Tehran stubbornly resisting diplomatic means to end the nuclear weapon-row and Washinghton about to add to its pain by adding even more sanctions, this does not look to have a happy ending.
Ultimately, though, dimming prospects for the U.S. dollar might have the biggest say in the gold trajectory. As Kit Juckes, global macro strategist at Société Générale has told MarketWatch, the latest dollar selloff marks the end of the third rally by the greenback since the collapse of the Bretton Woods system in the early 1970s.
“Given what we think the Fed will do in the next year or so, there is a lot further for gold prices to rise,” Juckes has said, as reported by MarketWatch.
There are big fiscal and macroeconomic factors that have suddenly aligned in gold’s favor.
Bulls will be delighted to hear positive vibes such as Juckes’ as well as predictions by this billionaire fund manager who sees the rally taking prices to $1,700 an ounce.
By Alex Kimani for SafeHaven.com