Gold’s almost 10 per cent advance this year will be in jeopardy should US president Donald Trump’s key address to Congress on Tuesday reignite the dollar rally and prospect for higher interest rates.
The yellow metal has been one of the chief beneficiaries of the cooling this year of the so-called “Trumpflation” trade, which sent the dollar to a 13-year high in early January and helped buoy prices for industrial metals such as copper on hopes that the new administration in Washington will cut corporate taxes and unleash a fiscal spending plan.
“Reflating the US economy was why everyone got excited about the industrial commodities and you saw people bailing out of gold and into more risky assets,” according to David Wilson, an analyst at Citigroup.
While equity investors want Mr Trump to use his address to Congress on Tuesday night to supply greater details on his economic stimulus plans, gold bulls will be betting that the uncertainty over exactly what the White House will deliver is going to persist.
Hedge funds, for example, early last week lifted their net long position in gold futures by just over a fifth to the highest level since November, according to data from the Commodity and Futures Trading Commission. At the same time, the largest gold-backed exchange-traded fund had $1.5bn of inflows so far this month.
“Investors are betting on continued uncertainty that’s been the pattern of his campaign and since his inauguration,” said George Milling-Stanley, head of gold strategy at State Street Global Advisors.
The SPDR Gold Shares, the largest gold-backed exchange-traded fund, has returned 9.3 per cent this year, compared with just 5.7 per cent for the S&P 500 index. In yet another sign of positive investor sentiment towards gold, short positions on the SPDR Gold ETF — or those betting on a fall — are at their lowest levels since August 2009, according to Standard Chartered.
Beyond the US, gold has had other drivers of demand so far this year. In Europe, investors are looking to protect themselves against political risk associated with the upcoming French presidential election where some fear far-right leader Marine Le Pen could deliver a shock victory.
Meanwhile in Asia, the gold price is benefiting from an uptick in jewellery demand in China after declining sales last year. Shares in Hong Kong-listed retailed Chow Tai Fook have risen 19 per cent this year, with same-store sales rising by 4 per cent in China for the three months ending in December.
“We still have decent economic growth in the emerging markets so that means we’re going to see good jewellery demand,” said Mr Milling-Stanley of State Street. “And we’re also seeing because of currency weakness there is more investment demand that’s been very helpful.”