By Matein Khalid
Gold was a disaster after it peaked at $1,930 an ounce in September 2011 and then dropped to $1050 in a savage bear market that mauled the gnomes and goldbugs of the Gulf. However, the yellow metal endeared a bull market in 2016 as gold bullion has risen 24 per cent while the gold miners index fund (GDX) I had recommended in this column has been one of the most profitable investments of 2016, up a fabulous 100 per cent. Gold is $1,325 spot as I write. What next?
It is likely that gold prices will be boosted by the Federal Reserve's reluctance to aggressively raise interest rates in order not to jeopardise a fragile US economic recovery, though money market futures predict one rate hike by December. Dr Yellen's Jackson Hole speech confirmed this view. This could mean that downside risk in gold on a Fed rate hike is limited to $1,270 an ounce. As long as the US central bank does not aggressively raise interest rates, there is no reason why the gold bull market cannot continue, though I expect the easy money in this asset class has now been made for 2016.
It has amazed me that savings rates in the US have doubled even as interest rates plunged in the last decade. The US consumer, 20 per cent of global GDP, is no longer acting as the growth locomotive of the global economy at a time when $10 trillion in debt in Europe and Japan offers negative yields - a template for deflation. The weakness in US retail sales, the slump in world trade and the 25 year lows in Chinese growth all reflect the retrenchment of the US consumer. This means that a multi trillion dollar deficit in the world's corporate and pension plans is a mathematical certainly. This one fact could blow apart the political consensus in the US, Asia and Europe. It could also provoke the next global financial catastrophe. Gold is a cheap insurance policy to hedge this macro black swan.
Despite Brexit, the Italian banking system, the distress of Germany's Grossbanken, recession in Brazil and Russia, the US dollar has not been able to manage a breakout to 99-100 on the US Dollar Index (DXY). The reason? The financial markets believe that US payroll rata momentum will not translate into accelerating economic growth and a far stronger US dollar. Since the market is sceptical about aggressive Fed monetary tightening in 2016, the US dollar range trades and gold remains well bid at $1,325 an ounce.