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GBIM Newsletter – Quarter 3 2017 – Why is gold not glittering?

Posted: 11th Sep 2017  /  By: GBIM
Categories: General News  /  Comments: 0

There is an old stock market adage: ‘The only predictable thing about gold is that it is unpredictable’. There can have been few periods when that maxim has seemed truer.

Yes, gold has had a steady 2017 so far, with the price advancing around 10% in US$ terms. But goldbugs have been frustrated by bullion’s weak performance since it peaked in the autumn of 2011, especially given the consistent background of worrying geopolitical events (see chart).

At times of political uncertainty, and/or rising inflation, gold is seen as an attractive alternative asset for investors. We currently have an unpredictable United States, which has bombed Syria and has deteriorating relations with Russia; territorial disputes with China in the Pacific; Trump promising tax cuts and infrastructure spending which would pep up global trade (reflation) and of course North Korea developing a long-range nuclear missile and the recent bellicose rhetoric between the White House and Pyongyang.

All of these recent dynamics (and longer term ones such as terrorism and the Middle East) create uncertainties which gold enthusiasts might reasonably have expected would support a strong bull market in the precious metal.

Bullion enjoyed the decade to 2011 when it peaked at $1,898 an ounce. Its price rise was sustained by two unusual factors: the use of quantitative easing (QE) by central banks which investors felt would lead inevitably to inflation; and the Euro crisis which caused fears about the break up of the single currency and the safety of European banks. Neither threat has come to pass (yet) and the sharp fall in the gold price in 2013 has been followed by a fairly tight trading range below $1,400.

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