Gold has had a great 2019 to date buoyed by the prospect of US interest rate cuts.
With the US central bank, the Federal Reserve, expected to slash its key rate when it meets on 30 and 31 July, bullion has found renewed favour with investors.
This is a normal reaction when dollar-denominated holdings become less attractive, given gold and the dollar rival each other as so-called safe-haven assets.
Dollar holding steady
During periods of calm, the dollar tends to be the winner in this tussle, given that paper assets generate a return while bullion does not. Indeed, it incurs storage costs.
But in times of crisis, particularly when the value of dollar assets is threatened by US inflation or by the prospect of war, gold comes into its own as an asset that cannot be faked or printed by politicians in the manner of paper currencies.
It is, famously, the only asset that does not depend on someone else’s promise to pay.
Perhaps unusually, gold’s latest upward surge has not been mirrored by a decline in the dollar.
Yesterday, gold traded at $1,427.75 an ounce, down 0.83% on Monday’s price. This morning it was lower, at $1,417.55.
One month ago, the price was $1,405.70 on 24 June and six months ago, on 23 April, it traded at $1,269.50. Twelve months ago, on 25 July 2018, the price was down at $1,224.05.
The proximate cause for the gold rally is the expectation of a rate cut from the Fed at the end of this month.
Growth remains subdued
But a change in tone from the Fed suggested otherwise. Originally, there were suggestions that it was giving way to pressure from President Donald Trump, who is keen to keep rates low to promote economic growth in the run-up to next year’s presidential election.
However, in its latest economic update, the International Monetary Fund (IMF) has warned of a slowdown, giving the Fed ample reason to cut the key federal funds rate – currently standing at 2.5%.
It said: “Global growth remains subdued. Since the April World Economic Outlook report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a sub-set of US imports.
“Additional escalation was averted following the June G20 [Group of 20 leading economies] summit. Global technology supply chains were threatened by the prospect of US sanctions, Brexit-related uncertainty continued, and rising geo-political tensions roiled energy prices.”
The IMF added: “Against this backdrop, global growth is forecast at 3.2% in 2019, picking up to 3.5% in 2020 (0.1 percentage point lower than in the April …projections for both years).”
The dollar, however, has proved resilient. Today it traded at €0.8978, and a month ago, on 24 June, it was worth €0.8773.
Twelve months ago, on 23 July 2018, it was worth €0.8554.