The longest government shutdown in US history shows no sign of ending, Brexit is roiling Europe, trade wars are still in the offing and the stock market is acting like a spooked cat. And once again, gold is shining.
Gold often shines in times of trouble. The last time there was a showdown between a US president and Congress over government spending, gold prices shot up to an all-time high, about $1,925 an ounce. That was when a Republican-controlled House of Representatives, led by John Boehner, sparred with Barack Obama over whether to lift the debt ceiling or risk the US Treasury defaulting on its payments.
Considering gold prices are hovering around $1,290 an ounce, it’s highly unlikely they will return to those earlier heights quickly. But even when the government reopens, analysts say the metal’s fortunes may soon sparkle after a few dull years.
In the fourth quarter, Comex gold futures prices rose 7.1% as stock prices started to skid. Although spot gold prices – the figure in the current market – ended 2018 down about 1%, that was a better showing that the 6% loss for the Standard & Poor’s 500 stock index.
George Gero, senior managing director at RBC Wealth Management and a 35-year gold trader, said the late-year stock market weakness kickstarted gold’s rebound, and the government shutdown fueled it.
Adrian Day, president of Adrian Day Asset Management, who specializes in gold, said Democrats regaining control of the House of Representatives in November was very positive for gold because it suggested there would be gridlock in Washington. “A government shutdown is gridlock on steroids,” he said.
It’s not just the shutdown that is boosting gold. Its biggest underpinning is an apparent softening in Federal Reserve policy, said Joe Foster, portfolio manager and strategist for VanEck’s International Investors Gold Fund.
The Fed has been raising interest rates, and previous expectations for 2019 were that the central bank would hike them again. But a more dovish tone by the Fed chair, Jerome Powell, in December and the release of Federal Open Market Committee meeting minutes, which suggest that the Fed may not be as aggressive in raising rates, were positive for gold, the analysts said.
Foster said investor interest in gold was also spurred by the view that the US economic expansion may be ending, another key catalyst for gold.
“To me there are two outcomes: either the Fed continues raising rates and they drive the economy into our next recession, [or] if they stop or reverse course, then we see weakness in the dollar. Both scenarios are good for gold,” Foster said. (Higher interest rates support the US dollar, and gold is dollar-denominated, meaning that when the greenback is strong, gold usually falters.)
Day said investors are reviewing gold’s traditional role as an insurance hedge and a portfolio diversifier after ignoring it for several years when stocks, bonds and the housing market were all strong. With those three markets showing signs of weakness, people are looking for alternatives, he added. And with cryptocurrencies like bitcoin having crashed from its own lofty levels in 2017, buyers are no longer considering that decentralized asset as a safe haven asset.
Day pointed to strong inflows into gold-backed exchange-traded funds as a sign investors are using gold to hedge against weaker stocks and uncertainty surrounding Brexit and the trade disputes.
Geopolitical concerns are particularly good for gold when prices are already on an upswing. The government shutdown between Bill Clinton and the former House speaker Newt Gingrich didn’t affect gold because the overall atmosphere wasn’t conducive; instead investors sought safety in cash. During the 1980 Iran hostage crisis, gold prices spiked because prices were already high. On Wednesday, US gold prices perked up slightly following the news the British parliament rejected Theresa May’s Brexit plan in a historically lopsided vote.
“If gold is already in a bull market, if the sentiment is positive, the moves can be very strong,” Day said.
Gold isn’t in a bull market yet, as it would need to take out the 2018 highs around $1,365 an ounce to break through the meandering pattern it has followed since falling off all-time nominal highs in 2011. Gero predicted gold would hold around the current $1,275 to $1,300 area for a while. But the more uncertain things become, the more brightly gold will shine.