The strong upward trend in the gold price during 2017 has not continued this year. After failing to hit a new high in April the price has been in retreat with a succession of lower lows. That has broken and reversed moving averages of the gold price pointing to a change in the technical assessment.
A template for making an investment case
When assessing these developments it is useful to cast a wider net and look across a broader range of investment approaches to see what other factors are likely to be influential and where they are pointing.
These approaches can be divided into five broad categories: valuation; economic; risk; liquidity and momentum. Unfortunately these don't produce a useful acronym (MRVEL?) but they do make sure that you look at the investment case from a number of different angles.
Momentum we've already covered in our initial technical assessment of the gold price chart. For sake of argument, let's agree that it could break either way, so we'll call it neutral and look at the other factors to see if they give us a better steer.
Valuation is a debateable factor for gold as it doesn't provide a stream of income to value, nor does it respond to supply and demand in the same way as other commodities as it is generally not consumed when purchased. One way of looking at valuation is to look at the price adjusted for inflation, so in 'real' or inflation adjusted dollars. The other is to compare it to the price of other assets, for example another commodity like oil. Either way gold is above long term averages at current levels.
Economic factors are also interesting for gold as we have seen it doesn't react to economic trends in the same way as other assets. One key influence on the gold price is inflation. Gold is unaffected by inflation, unlike most other assets which are negatively affected. That means that the price is likely to rise when inflation increases (even if it is merely staying the same in real terms). Inflation is currently rising and the Citi inflation surprise index shows that inflation is beating expectations in many countries for the first time in several years.
Risk is a key factor for gold since its position as a store of value means that it reacts positively to heightened risk. Risk is an obvious factor, but is very difficult to track as it comes in so many different forms which are difficult to compare. For example, does Trump diplomacy with North Korea balance off against the treaty break with Iran? Or a new coalition government in Germany balance the failure to form an Italian government?