Gold: differences of opinion
Why goes the gold price fall when war risk increases, and rise when tension relieves? And if oil goes up, why is that bad for gold? This is the opposite of what should happen.
MacleodFinance has received several requests for an explanation of this phenomenon from investors worried that as the situation over Iran deteriorates, or bond yields or oil prices surge that gold prices will fall. These concerns are increased by some so-called experts, often chartists forecasting lower gold and silver prices.
US-centric pricing is a credible explanation for gold’s performance, and this is how investment managers and hedge funds assess events when accounting for their profits and investment returns in dollars, euros, or yen.
Higher oil prices, in this case due to developments over the Persian Gulf are leading to higher inflation which in turn means higher interest rates. This is deemed to impose a cost penalty on being long of gold. Therefore, anticipation of these events makes the dollar attractive relative to gold. We have seen this relationship between oil and gold play out consistently over the Hormuz crisis and it explains why gold didn’t rise as a safe-haven hedge when political risk increased with the bombing of Iran.
Crucially, it assumes that there is minimal medium-term existential risk to the values of the dollar, euro, and yen.
The Asian view is very different. Asians ignore the interest rate argument adopted by Western paper markets because they see the risk to fiat currencies’ purchasing power. In their view, all paper currencies will be worth less in future and should be sold for real money, those sales starting with the dollar.
In short, paper traders in New York and London are blind to the risk to the value of paper currencies. Their view is that the risk is to assets, such as bonds and by extension probably equities. This is why they sell them for cash in the currencies in which they account.
The difference in approach is why gold and silver migrate from West to East. As oil prices soar, open interest in Comex gold and silver contracts declines. And stands-for-delivery continue apace as demand from Asian central banks and funds with excess dollar balances reduce their currency exposure.
