Gold prices have been holding up remarkably well considering the Trump-inspired market rally for the DOW and the S&P. March has come firmly into play for a Fed interest rate hike that appears targeted at prospects for higher inflation in the U.S. which hit a four-year high last month, jumping from 2.1% to 2.5%. (Pity your average American worker who saw his/her hourly earnings grow by a paltry 2.5% from January 2016, the weakest since August).
Copper – one of the best barometers of global industrial activity – has come to life as have metals that are typically used as alloys in steel making including zinc. Metallurgical coal (also used in steel making) and iron ore have all posted record gains in the past year probably because of Chinese stockpiling. (Rising commodity prices are usually a bellwether of higher inflation).
Let’s face it China has become a real wild card in the commodities sector given the unreliability of its economic data which has made it difficult to predict Chinese internal consumption for just about any industrial commodity. When the Chinese decide to buy, prices will go up.
You can also bet the country’s published gold reserves are a pipe dream. China, the world’s largest gold producer, has been absorbing all its internal production, building up its gold stockpiles in an attempt to reduce the monetary and political influence of the U.S. dollar. Some Russian oil producers are now settling crude sales to China in renminbi rather than U.S. dollars, a trend that would serve to weaken the U.S. dollar in the longer term.
It will be interesting to see the U.S. dollar’s reaction to Fed interest rate hikes in the coming year should they actually happen. Trump is not a particular fan of the U.S. Federal Reserve and presumably its Chair, Janet Yellen, whose leadership role is said to be tenuous by some observers.
Trump also isn’t averse to talking down the dollar in his twitter posts – not to mention all of his media critics. (Wouldn’t it be wonderful to be a fly on the wall with a direct line to your broker as The Donald prepares a tweet criticizing U.S. dollar strength given the immediate impact such a statement can have on foreign exchange markets)?
Trump has built his business empire from debt and if that philosophy carries through into his presidential decision-making process you can bet that U.S. debt will grow exponentially. Also, should his infrastructure program ever get off the ground that will add to the inflationary pressure on commodities, especially gold!
Investing in commodities – and their equity proxies, the miners – can be a life altering experience given the volatility in this particular market sector. The best strategy is to take a long term view for your investment which in my experience can be 2-3 years.
There’s plenty of room for the miners to run yet. The hardest part is filtering out all the noise in the market place including technical analysts who are short term traders to begin with whose attention spans are generally measured in hours rather than months or years. (But perhaps I’m being too kind).
Also, it’s best to avoid recommendations from U.S. and European bank analysts – with the exception perhaps of some Canadian bank analysts who tend to be more gold savvy. In my experience most commodity analysts are somewhat like university professors who are often judged by how much they publish but not always by the quality of their work.