Gold has spiked in overnight trading, pushed higher by the failure of the Trump administration last week to repeal and replace Obamacare. Trump needed a victory to mark his first 100 days in office and the loss likely signals more trouble ahead for an administration that appears to be in total disarray amid calls for the resignation of house speaker Paul Ryan whom Trump has rebuked publicly. The failure to appeal Obamacare also puts at risk Trump’s plans for tax reform, the prospects for which have fueled a broad market rally since the Republicans won both the Congress and the Senate.
In the past week, the U.S. dollar index, which weighs the greenback against a basket of currencies, tumbled below 100 and Sunday night traded at a low of 99.08. This helped push gold higher by over $13.00 by midnight New York time, setting up what could be a substantial move at the market open tomorrow.
If there ever was a time when the stars were aligned in the heavens for gold it’s probably now. Several factors are coming into play that could strengthen demand for physical metal. One of them is the new Shariah gold standard approved in December 2016 which will expand the variety and use of gold-based products in Islamic finance. According to John Hathaway of Tocqueville Gold Fund this could “lead to the creation of investment products such as gold ETFs for the Islamic world (25% of global population), a market that has not been penetrated.”
Physical supply and demand remain positive and gold prices are presently too low to justify expanded mine supply. Discoveries of new orebodies are at a quarter century low and the time required to bring new orebodies into commercial production is now approximately 20 years – and these are in some of the world’s better mining jurisdictions. Consumption in major markets such as China, India, Turkey, and Russia have exceeded global mine supply since 2013 and shows no signs of abating any time soon.
China is also seeking to dominate world oil trade in yuan backed by gold which has negative implications for the petrodollar system that has underpinned the dollar’s dominance in global commerce since the 1970s.
It’s unlikely these positive drivers for gold will all unfold overnight, however, getting positioned in the gold market beforehand is clearly a good strategy. With gold mining companies focused on reducing production costs and debt levels, gold producers – both major and intermediate – would appear to be the best way to bet on gold’s increasingly bullish outlook.