The price of gold hit a one-year high yesterday at £1,024 per ounce as Brexit, poor global economic performances, trade fears, harsh debt levels, and the US government shutdown all continue to weigh on investor confidence.
The strong US Dollar is continuing to keep pressure on both the Pound and the Euro, which in turn is driving the gold price higher in Sterling compared to slim gains in USD. The new price means gold is approaching levels in Sterling not seen since 2016, though with Brexit still to be resolved the gold price could surpass the all-time high of £1,178 per ounce set in September 2011.
The gold price is on the up in line with the historical trend of a negative correlation between gold bullion and stocks. Gold started 2018 slowly but improved by the end of the year. In contrast, the stock markets – in particular those in the United States – enjoyed a bumper start to 2018 before falling into correction territory and bear markets by the end of the year.
The FTSE 100 more so than the 250 has been resilient to a lot of the ups and downs of the Brexit negotiations, due to weak Sterling benefitting the large number of foreign investors through the exchange rate, but even the FTSE 100 finished 2018 down by 12.5%, recording its worst annual performance since 2008’s financial crash and a loss of more than £240 billion total value. By the end of New Year’s Eve, the FTSE 100 had lost 960 points for the year, and almost 1200 points since the May high-point. The only real winners have been precious metal miners, with the FTSE Gold Mines Index gaining 15.85% in the three months to December 31.
The UK isn’t alone in its suffering, with US stocks also registering their worst year since 2008 – and the worst December performance since 1931. Gold hit a six-month high of $1,297 per ounce (currently $1,291) this week, with investor interest steadily switching to gold bullion. Based on market data, the gold price has grown by 345.39% between New Year’s Eve 1999 and New Year’s Eve 2018, compared to gains of 70.62% for the S&P 500 market.
2018’s early success can be attributed at least in part to President Trump’s administration implementing a wide-range of tax cuts, but with these aimed at the richest in society there has been a ‘flash in the pan’ benefit. This is now over, and while the economy is still in a good position, there are signs that US investment spending is declining once again and that the jobs market is at its peak.
Some will argue that this reads like mission accomplished; the economy is strong, the US Dollar is strong, the US markets have – until recently – been strong, interest rates are low (despite the President’s complaints) and unemployment is very low. The problem is that the US government needs the economy to stay as strong as it is in order to cope with their debt burden. The Treasury must refinance approximately $1 trillion of US debt in each 2019 and 2020, and it’s uncertain where the money will come from.
There are plenty of strains on global economies currently. The US Government is in a partial shutdown due to a funding issue – with the Mexico Wall a stumbling point – while elsewhere there are poor retail figures in China, weak factory data from the Eurozone and Asia, as well as concerns over Russian foreign policy (re: Ukraine), fears over Italy’s fragile banking system, and stalemate in the Spanish Parliament over its next budget.
As a result of these strains, and subsequent concern, the Japanese Yen, Treasuries (gilts or bonds), and gold bullion are all doing well. Treasuries eventually hit a point they are no longer a good deal, with their yield value falling the more that bonds are bought, so ultimately there’s limited availability. The 10-year US Treasury bond yield has fallen from 3.24% to 2.55%, illustrating this point, and those who can’t buy will likely turn to gold as the safe haven of choice.
Federal Reserve Chairman Jerome Powell will be speaking later today with former chairs Janet Yellen and Ben Bernanke, with the three discussing the US economy, its outlook, any hints about interest rates, and general investor fears for 2019.