Q2 2018 : Quarterly Gold Price Review
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We take a look at what happened to gold in Q2 2018, how the price of gold was affected by key market events and what may happen in Q3 this summer.
Q2 2018: Gold Price Overview
The second quarter started fairly quietly with gold hovering around £945. As news emerged that Syria had launched chemical attacks against its own citizens, Trump, May and Macron formed a united front by responding with a series of air strikes against Assad's chemical weapons facilities. Gold dropped 1.65% to £937.86, the lowest this quarter, and sterling rose to an 11-month peak against the Euro.
China’s reliance on credit-fuelled growth has proved to be the undoing of the world’s second most powerful economy. China’s national debt surpassed its gross domestic product by 300%. In May, for the first time since 1989, China's credit rating was downgraded to A1. Unsettling investors and raising concerns about financial instability.
Over the past decade, China has stealthily been building ports, railways and bridges around the world to facilitate a smoother trading route on land and by sea; creating a modern Silk Road. China had invested in a trillion-dollar international trade plan which included investing in overseas companies that would be used as a funnel to stimulate economic growth and boost exports. This set back has had a knock-on effect on Chinese owned overseas companies.
The House of Fraser, that stalwart of the British high street, is under threat as its Chinese owners, plan to sell its majority stake and close 31 stores across the UK and Ireland; a blow to towns already struggling with empty shops. The owners had originally planned to sell premium brand Chinese goods and to open a series of stores in Russia, the Middle East and China. Whilst Chinese capital has been a welcome source of finance for numerous projects and businesses around the world, governments are now starting to realise that such heavy dependence on foreign investment could come at a heavy cost as China tightens its belt.
Although a war was unlikely, the relationship with two of the world’s loosest cannons, Trump and Jong-un, alarmed neighbouring countries and threatened what has recently been a fairly calm global economy. On 12 June, in their first-ever summit meeting, North Korea held out a hand of friendship to the United States and agreed to dismantle their controversial nuclear facilities; the risk of a nuclear war subsided to a murmur.
Russia has overtaken China's accumulation of gold. Currently standing at 1890.8 tonnes, against China's 1842.6 tonnes, both countries have a long way to go before they reach America's reserve of 8133.5 tonnes. After Gordon Brown's costly blunder when he sold more than half of the UK's gold reserves, the UK stands at a mere 310.3 tonnes, slightly in front of Turkey but lagging way behind France and Germany or even the Netherlands.
Over the last two years, Russia has been increasing its gold reserve. No doubt, they have been spooked by the possibility of having their currency assets held in the USA frozen if they don't dance to Trump's tune. Such a development would be seen as a declaration of war against Russia, not a move that we expect Trump to make but after seeing the US freeze Kazakhstan's assets do not be surprised if we see an even bigger boost in Russia's gold holdings.
European Central Bank
As the European Central Bank announced that it was ending quantitative easing this year, the Euro fell against sterling and the US dollar. Gold peaked at £981.10, the highest gold price of the quarter and a nine-month high since the giddy peaks of September 2017 when gold rose to £1,030.
US Trade Taffiffs
The threat of a major trade war is gathering momentum as the impact of US trade tariffs starts to kick in. This may not have the desired effect that Trump has promised as the US economy could shrink instead of expanding, spelling disaster rather than success. Analysts at Bank of America Merrill Lynch have cautioned that "the probability of a full-blown trade war is low but the risks are rising" and that a global trade confrontation could tip the US, and possibly the rest of the world, into recession. The dire warning that the US markets have hit their peak and predictions that the 9-year bull market could be at an end could leave investors exposed to huge losses if they are left with risky assets such as equities and commodities. Their advice is to move your capital and buy gold, US treasury bonds and the dollar.
The International Monetary Fund has issued a stark warning that the global economy is slowing down and that urgent action is needed to buffer the impact of Trump's Trade Tariffs, over-dependence on debt, political uncertainty and insecure currencies Euro.
After the US-China trade talks at the beginning of May, Xi Jinping was given notice that China would be hit by trade tariffs in July. By devaluing the Yuan and reducing the Chinese banks' cash reserve requirement, they are hoping to counter the forthcoming negative impact on the Chinese economy. But with an economy heavily reliant on credit, reduced exports to the US and Trump accusing them of technology theft, China is in for a challenging year ahead.
Where does Europe stand in this? As tensions escalate, there is an element of tit for tat in Brussels as they retaliated by imposing higher taxes on Harley Davidson motorbikes, bourbon and denim jeans – hardly likely to make Trump shake in his cowboy boots as he eats his jelly beans.
Pro-Europe billionaire George Soros expressed fears that the European Union is on the brink of a major financial crisis as poorer countries struggle with debt crisis and austerity policies. As Greece's current bailout programme looms for renewal in August, Eurozone countries offered another lifeline to the beleaguered country as a further cash bailout of €15bn was agreed. Usually, the taskmaster of Europe, Germany is facing its own inner turmoil as its economy shows signs of fragility and Merkel struggles to hold on to power. The US division of Deutsche Bank has failed the US Federal Reserve's stress test and the US trade tariffs could cast a crippling blow to the German auto industry.
Whilst the EU is determined to corral the member states together, deep cracks are forming as populist ideals create political uncertainty and threaten the status of the union.
Britain's inner conflict with Brexit continues to fuel uncertainty in the UK economy. Whilst Remainers'hope for a second Brexit referendum and fight to have their concerns addressed, May has been urged by business and unions to increase the pace in the negotiations so that plans can be drawn up for the future. The Bank of England has issued a red-light warning on the lack of progress from the EU, raising concerns that cross-border financial contracts worth approximately £29 trillion could be at risk if negotiations are not concluded by March 2019.
The latest figures from the Office of National Statistics revealed that the British economy has not slowed down as much as was feared previously. Q1 2018 growth was upgraded to 0.2% - not a huge leap but a move in the right direction.
The Gold Price Q3 2018: What We Can Expect
Are we in for a long hot summer full of golden sunshine? Well, English summers are notoriously difficult to predict and so is the gold price. May will face further turmoil as so many of her own inner circle look to take on the leader's mantle. The Bank of England indicated that an interest rate hike is likely later this summer although Barclays Bank has forecast no increases.
The US Federal Reserve has said that another two rises are planned for 2018. However, higher interest rates can have an adverse effect on the buoyancy of the economy as consumers and businesses feel the pinch.
Whilst US analysts are saying that gold is looking bearish providing investors with a golden opportunity for buying, we would suggest that gold is in a fairly neutral zone with the precious metal heading towards a bullish zone towards the end of 2018 as Trump faces the midterm elections in November.
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