Gold gets a Trump bump

The stars continue to align for gold, a commodity which is behaving more like a currency every day, thanks to the intervention of governments.

In the four weeks since our last look at gold on June 12, the price has risen by 4.7 per cent whether measured in U.S. or Australian dollars – more than double the rise in the ASX All Ordinaries index over the same time.

Interesting as the upward move in the gold price over the short term might be, the real game with gold is longer term and with a political flavour, specifically the U.S. Presidential election in November next year.

In military terms, gold has become a collateral beneficiary of a campaign launched last month by the U.S. President Donald Trump, who is seeking to “weaponise” the U.S. dollar for the next stage of his attack on trade enemies, China and Europe.

Trump’s aim is the lower the value of the U.S. dollar to aid exporters because he believes trade rivals have been doing that with their currencies to undercut U.S. companies.

Whether the President is right or not when it comes to his allegation of currency manipulation by China and Europe is irrelevant because he seems determined to force the hand of the U.S. central bank, The Federal Reserve, to drive down the dollar, starting with an interest rate cut.

In simple terms, if Trump achieves his aim of a more competitive currency through lower interest rates, perhaps all the way down to 0 per cent, then gold will be a winner because it is already in the 0 per cent category because in its bullion form, gold does not pay interest.

Given a choice between holding 0 per cent gold and 0 per cent dollars, an increasing number of investors will make the shift away from a currency which is being manipulated for political purposes, and flee to the safety of an asset class beyond the reach of government, such as gold.

Russia and China, two countries in the crosshairs of the trade and ideological war being waged by Trump, have been shifting out of dollar-denominated assets into gold at an increasing rate.

Last month, China bought 10.3 tonnes of gold, taking its purchases this year to 74 tonnes and lifting its total gold stocks to 1916 tonnes. Russia has been even busier, buying 274 tonnes of gold last year to stand at 2190 tonnes.

Both China and Russia are well behind the U.S. gold horde of 8133 tonnes, but it’s the trend which is interesting because as well as buying gold, China and Russia are selling U.S. dollar assets.

In Russia’s case, the exposure to the U.S. dollar has dropped from 46.2 per cent of its central bank international assets in 2017 to 22.6 per cent today. Gold is steady on a percentage basis at 16.6 per cent.

Other countries are boosting their exposure to gold as uncertainty grows about future currency values. Poland, for example, has doubled its gold stake to 128 tonnes over the past 12 months.

Investment banks, despite many of them losing touch with gold because of a misguided belief that it is an old commodity with no place in a portfolio of assets, are slowly waking to the political games being played which are magnifying the role of gold as a global currency.

Trump’s recent “Tweets” about the Federal Reserve have stirred concern that he is genuine in his demands for lower interest rates and if Jerome Powell, current chairman of the central bank, will not deliver a rate cut he will be dismissed.

The attacks on Powell started late last year when the Fed raised interest rates against Trump’s wishes. In his latest Tweets on the Fed, Trump has said: “We don’t have a Fed that knows what they’re doing”, adding that if rates were cut economic growth would be “like a rocket ship”.

Another Tweet from Trump accused China and Europe of being 'big currency manipulators', followed by a call for the U.S. to “match, or continue being dummies”.

Achieving rocket ship rates of growth imply a dramatic increase in U.S. exports which would come with a more competitive currency, and if the currency is cut then gold will get a substantial boost.

The Bloomberg news service reported yesterday that: “a chorus of Wall Street foreign exchange analysts is writing about the risk of Trump moving beyond words in his quest for a weaker dollar”.

Triggers for U.S. intervention in the currency market include a possible European rate cut later this month, or direct European economic stimulation later in the year.

What Trump wants in the lead up to the 2020 Presidential election is a stronger U.S. economy, with currency values a key factor and if other countries play the same currency devaluation game, gold will be a big winner.

Speculation about how high gold might go in a race-to-the-bottom currency war is starting to stir gold bugs with the initial target being the 2011 price high of $US1895 an ounce, but with talk of $US2000/oz being possible.

Whether gold can rise that far seems unlikely but no more unlikely than forecasts of U.S. interest rates diving to 0 per cent – which is actually better than the minus 0.3 per cent on some German bonds or the negative yields on an estimated $US12 trillion of bonds around the world.

The further interest rates fall the stronger the case for gold, which is why watching gold today is not about looking for the conventional supply and demand measures used to value most commodities, it’s a case of watching currency and government-driven interest rate moves.

Gold stocks to watch:

Bellevue Gold (BGL) featured in last month’s gold report and it remains a project developer with a bright future as it redevelops the historic Bellevue mine in WA. Over the past month, the stock has added 7c (11.5 per cent) to 67c, but did reach a 12-month high of 74c in late June.

Independence Group (IGO) has also risen by 11 per cent to $4.92 since our earlier gold story, thanks to its well-balanced mix of gold and nickel assets. As a general rule, when gold is rising, base metals such as nickel and copper are falling, though in the current market both gold and nickel are trending up.

Capricorn Metals (CMM) heavily sold down over the past 12 months because of internal management disputes over how best to develop its flagship Karlawinda project in WA, Capricorn has just seen a new and experienced management team take control, plus receiving an injection of fresh capital which has boosted the share price and with more likely to come. Canaccord Genuity reckons the stock will rise from its current 13c to 20c.

Gold sector leaders such as Northern Star (NST), Evolution (EVN), Newcrest (NCM) and St Barbara (SBM) have all risen strongly this year, in most cases, their share prices are well ahead of the gold price.