Gold Price Analysis - January 2019

Gold Price Peaks!

To the back drop of gloomy equities gold price rallied in early January hitting a 12-month high of £1031 per ounce. We saw an influx of both sellers and bullish buyers cashing in on a 13% price rise from October lows.

Previous Month's Gold Price

Gold backed ETF's surged in December as investors shifted out of equities and into safe havens, notably gold. Funds rose by 2.4m ounces or 76 tonnes equivalent to inflows of roughly $2.5bn according to the World Gold Council. Palladium price exceeded £1000 per ounce for the first time, spurred on by its use in catalytic converters and car sales. The meteoric 140% rise since the beginning of 2016 saw palladium outperform spot gold price.

This said, I would suggest caution with any long-term plans on palladium as electric cars slowly replace combustible engines catalytic convertors will become a thing of the past! Not only that global economic slowdowns as predicted for 2019 will provide an inevitable slump in car sales as demand drops off. For now, at least, the restricted supply of palladium is likely to keep the price high. Oh, if only we had a crystal ball, we may have bought in more palladium stock but thats the way it goes sometimes!

Palladium Bull Run!

On Thursday 17^th Palladium hit a record high of £1114.00 and is still trading above £1025 as I type this. Palladium has seen an increase of almost 80% since January 2017 and we are left guessing whether it will stabilise at a high price like gold or bubble and collapse when investors lose interest. It does have industrial uses mainly as a catalyst in catalytic converters and as diesel cars have taken bad press of late prices are storming higher. As future policy shifts away from the combustion engine in general, I expect palladium price to suffer long term regardless of where this bull run ends up. That is unless another major use is found......see the price rise on our live price graph below:

Palladium Rise From Jan 2017

Brexit

Corbyn is planning a vote of no confidence which would lead to a general election should Theresa May's Brexit plan end up down voted in the House of Commons. A general election may be the only way to break the deadlock as Labour pushes for a permanent customs union but many in Government are worried not only about Mr Corbyn but the potential for extreme socialist policies from his inner circle once they gain power. It is for this reason a vote of no confidence is likely to fail but we will see as the drama unfolds! 

The Airbus chief, Tom Enders, remarked Brexit as "really unbearable" and in an AGM briefed staff and the Chancellor as follows:

“Whether you think that leaving the EU is good for the UK or not, by all means: stop filibustering around this issue, allow for an orderly, agreed Brexit and find an agreement with Brussels,”

We couldn’t agree more, and we would like to see all representatives in Parliament working together rather than playing politics which could all end disastrously for the electorate. At this stage a delayed divorce is looking likely. 

On 15th January Theresa May’s plan wasn voted down. Gold price climbed in anticipation before the vote up to £1014 and then following the vote immediately dropped to below £1002. The markets are all over the place with some taking comfort that a Brexit is no longer around the corner and even hopes from some in the business world that Brexit will not happen at all. It does seem unlikely, to me at least, that we will leave with no deal, but it is starting to look like Theresa May won’t be leading the negotiations much longer as she faces a vote of no confidence tonight (16th January).

Mr Corbyn has called for Theresa May to talk no-deal off the table as a pre-requisite to entering any form of cross-party talks, claiming acceptance of the current deal is essentially blackmail to an otherwise chaotic divorce.

UK Economy 

Productivity - falls to lowest rate for 2 years in January leaving companies struggling to meet wage demand which may result in consumer costs increases to meet the short fall. Without growth policy makers in the BoE may have to stifle growth with interest rate rises to prevent the economy overheating and prices spiralling out of control. 

Lacklustre Christmas - The festive period did not bring the expected fat stocking filler many retailers had on their wish lists and there was no happy ending after a shaky 2018. Even with industry wide price slashes  retailers simply could not stimulate significant levels of buying. Maybe this overhanging Brexit deal, living costs or simply a change of mood away from consumerism at Christmas are at the root of UK retailers’ problems. December was the worst month since 2008 which echoes concerns of a wider global economic slowdown. John Lewis, M & S, Debenhams and Halfords all cut forecasts whilst Tesco reported they were on track with end of year forecasts. John Lewis is even considering cancelling staff bonuses for the first time since 1953 adding more woes to the high street!

Equities - UK equities have joined global indexes bouncing back slightly at the beginning of the year. However, this may not last long as we watch UK politics disintegrate right in front of our eyes. Essentially the prolonged process adds to the UK’s woes as business decisions are delayed or even stagnate. This state of limbo sees the FTSE 100 was 0.6% down this year, the FTSE 250 flat at 0.02% and government bonds weaker.

UK Retailers - Hedge funds continue to bet against UK retailers short selling stocks and cashing in on underperforming stores such as Debenhams, Marks and Spencer and ASOS! Consumers are rightly cautious to over spend or take on cheap credit so we can expect more suffering to be inflicted in the short term. The step change here is the forecast warning are not restricted to bricks and mortar but instead continue into the online world of shopping.  

Sterling Price

After a disastrous start for sterling where prices bottomed out below $1.25 the currency has recovered currently trading at $1.27677 as of Monday 10th January. As previously mentioned sterling is highly susceptible to Brexit noise with any announcement generating wild price swings. With Brexit negotiations far from complete, an impending divorce deadline and likelihood of extended deadlines we can't see anything to be optimistic about. If anything, try to mitigate your exposure and reduce risk by investing in safe haven assets such as gold. 

The currency saw a rally climbing from $1.270 to $1.288 erasing all losses leading up to the historic commons vote on Brexit on 15th January. Traders are braced for a rocky road ahead as the prospect of a lengthy and delayed Brexit takes hold. A vote of no confidence, a general election, tit for tat, no Brexit, hard Brexit, Norway plus, a second referendum or even unilaterally ended the Brexit process will all take a time, possibly a new government, and undoubtedly push us past the 29^th March.

Most of the under performance of our local currency hinges on the increased risk of a no deal scenario becoming reality. Longer term prospects are better with UBS and Nomura banks both predicting a rally later in the year and most estimates set GBP at $1.59 or so, not its current sub $1.30 position. The struggle is purely a result of uncertainty, Brexit woes and clients of UBS are still being advised to hedge against potential losses, especially in the short term.  

Global Markets

Apple Profit Warning - Apple's fall from a trillion-dollar company in 2018 is either a correction in market value or a an end of an era of obsolescence. I don’t think we will truly know whether the Iphone’s obsolescence (which "forced" consumers into a brand new Iphone purchase) was planned or simply the by-product of ever advancing technology. It is clear however, from Apples forecast warning, that consumers are slower at buying new kit with many opting to repair older models. Apple suffered a 10% drop in share value which later filtered into global markets with commentators suggesting links between the trade war and a global slowdown in consumer demand. Eventually Apple lost its dominating market cap position first to Microsoft and now to Amazon as Jeff Bezos' company inched ahead of Microsoft to become the most valuable PLC in the US. 

German Economy - statistics from Germany show their economy contracting to the back end of 2018 with the Eurozone instability and global demand adding further pressure. If the German economy continues to contract we expect contagion across European states, more market turmoil and even more reason to invest in gold!

US Government Shutdown - European stocks begin to suffer as concern grows regarding the current impasse in US politics as President Trump refuses to budge, along with Democrats, on the funding of the wall. Donald Trump risks alienating his base if he does not carry out his election pledge whilst Democrats risk infuriating theirs if they concede. Recent polls show that most of the US electorate blame Trump for the ongoing shutdown and not Democrats, so Democrats have it all to play for. Keeping government workers hostage whilst political power games are played out is rather unfair in my opinion however.  

Sino US Trade Deal - negotiations continue between the two biggest economies with reports of some progress. China has been reported to agree to purchase US agricultural, manufacturing and energy products to balance the deficit. News of some light at the end of the tunnel prompted markets to respond positively with the Shanghai's CSI 300 up 1.95% as of 9th January.

Venezualan Elections -  Nicolás Maduro has been sworn in as President with many countries refusing to acknowledge the presidency as legitimate. This means any attempt to overthrow him would not be viewed as a coup by the international community. Whether the political and social unrest spreads across South America remains to be seen but tensions are already running high in Brazil under their new right-wing president where their country is taking the brunt of the Venezuelan refugee crisis. Brazil is an important emerging market and could do with focussing on their economy rather than dealing with neighbourhood spats which are likely to absorb signficiant resources to deal with. 

Gold Mining - In gold news Newmont Mining is to acquire Goldcorp for a handsome $10bn making it the world’s biggest gold miner. Their operations will span the Americas, Australia and Ghana. In 2018 alone both mines produced an output of 7.8m ounces of gold with an intrinsic value of roughly $7.8bn. The industry looks to address recent years lacklustre returns with consolidation so expect more mergers in the coming months and years.

Global Economic Policy Index - Deutsche Bank have reported that the global economic policy index is “flashing red” over Brexit, the US government shutdown and the Sino-American trade war. The markets remain bearish with many asset managers predicting a slow 2019.

Euro - The Euro makes it to the old ripe age of 20 but whether the currency sees another decade is up in the air. Given the state of EU relations, Brexit, Italy’s Eurosceptic parties and the rise of a number of nationalist parties across the bloc provides a far from certain future.

Chinese Economy – as of 21^st January Chinese GDP growth has slumped to its lowest rate since 1990. The ripples have been felt through global stock markets with the EU Stoxx index down 0.2%, the DAX down 0.6% and the CAC down 0.2%. Effects in Asia were more pronounced with the Hang Send index down 0.8%. Ongoing trade tariffs and geo-political tensions show no signs of easing adding further to future worries of recession.

Sino-American Relations – US stocks lifted to news reports of scaled back US tariffs on China but there are still conflicting reports from Washington with some officials seeing any scaling of tariffs as a weakness in the ongoing negotiations.