The gold price is clearly void of direction at the moment. The gap between the previous annual high and low lies at only USD 55 per troy ounce.
This comes as a surprise to some investors given the comparatively high level of uncertainty in the current climate. Terms such as ‘trade war’ and ‘geopolitical escalation’ are being bandied about in the media. Attention could focus more strongly again on the latter, for example, if the nuclear deal between the USA and Iran were to be scrapped, which is quite possible. This difficult situation might be expected to boost demand for gold as a “safe haven” for investors. But it isn’t! Not even the noticeable rise in stock market volatility compared with the previous year is helping the price of gold back on its feet.
The reason for this is quite simple: Since gold is not a scarce commodity, demand is especially important. But precisely this is very weak at the moment! In the first quarter, for example, the weakest demand in ten years was reported, at 973 tons. It’s not the jewellers and/or central banks that are responsible for this, but solely the investors. Interest in both physically-backed ETFs (-66% y/y) and bars and coins (-15%) fell considerably in the first quarter.
So how will things develop with the gold price? Some investors, particularly in Europe, are disappointed. While the price of gold in US dollars rose by 11% in the last three years, all that was left for the euro investor was a meagre gain of just under 3%. The weakness of the greenback was therefore the main factor driving the gold price, while other positive factors are lacking. A gap is now even opening up between the US real interest rate, which determines the opportunity costs of gold ownership, and the price of gold. According to our estimate, this gap can be closed either by a sharp rise in inflation or a fall in the price of gold. As we see little likelihood of the former happening, with US interest rates continuing to normalise, we expect the pressure on the gold price to intensify again looking ahead. Only a full-scale stock market crash or a significant geopolitical escalation that goes beyond mere sabre-rattling, could argue against our price scenario. But we see little likelihood of such a negative scenario.