Gold: All that glitters does not make the economy shine
“All my life, I have been in love with its color, its brilliance, its divine heaviness,” said villain Auric Goldfinger in the James Bond movie. Those words could probably have been spoken by many people in the Arabian Gulf, and — since the election of President Donald Trump — by an increasing number of investors globally.
Goldbugs — investors who are convinced of the intrinsic ability of the yellow metal to deliver a financial return — will love the fact it has taken off over the past couple of months. The rest of us should be wary and treat it as another warning sign of an increasingly volatile global financial system.
In the immediate aftermath of Trump’s victory in November, the price of gold fell as the obvious attractions of equities and bonds took over. Wall Street liked Trump’s policies on fiscal easing and infrastructure spending and all the action was in traditional securities, like shares and fixed-interest instruments, at the expense of gold.
Then, around the middle of December, the balance began to shift. The gold price began to edge up again as some of the economic uncertainties of the then president-elect’s policies became apparent. Gold is often seen as a “safe haven” investment when financial securities are regarded as more risky.
Since the inauguration speech and the chaos that followed, the trend has accelerated. Gold was up about 8 percent in 2016, but leapt 6 percent in January alone. It currently stands at around a three-month high of $1,241 per ounce. (Bullion is, quaintly, valued in the old imperial system.)
Golden trade in the Gulf
That is good news if you are a gold aficionado. Many people in the Arabian Gulf like gold as a product and as an investment instrument. Saudi Arabia and the United Arab Emirates (UAE) in particular are big importers of gold, coming in the top six of gold importing countries in the world.
In Dubai — which serves as an entrepôt for gold in the region — you can see the stuff being electronically traded at the Dubai Gold & Commodities Exchange, and then travel a few miles down the road to see it physically changing hands at the Gold Souq.
The recent surge in the yellow metal could signal problems ahead for world financial markets.
The geographic proximity to India, the world’s biggest gold consumer, is a big factor in the Gulf’s importance in the global gold business.
The overall rise in the gold price over the past 12 months has, however, been led by trade in exchange-traded funds (ETFs). These allow investors to speculate on future movements in the price without ever setting eyes on a bar of bullion and comprise the vast majority of gold trades in a global market worth trillions of dollars.
ETF investors are nothing like Auric Goldfinger, quoted above. For them, gold is just another asset class and they will buy or sell according to their view of global financial and economic prospects.
Turbulent times ahead
That is why the recent surge is significant. It could be part of a bigger trend that is telling us that there are problems ahead for world financial markets.
This might seem alarmist. Global equity markets are near all-time highs and the VIX index — the volatility, or “fear” index produced by the Chicago Board Options Exchange — is comparatively low.
But as Bloomberg pointed out this week, these benign indicators are at odds with several other measures of the financial outlook.
The Global Economic Policy Uncertainty Index — an indicator produced by some top US economists — is at an all-time high, suggesting concern about economic policy has risen since the start of the president’s chaotic term in the White House.
At the same time, the Skew Index, a measure of the price of buying protection against market volatility, shows a big increase, suggesting a perception of risk ahead.
The really worrying factor is the correlation between the gold price and bond yields. When these go up in tandem, it has been a harbinger of market crashes in the past. Just as the price of gold has risen in the past month, yields on US 10-year Treasury bonds have leapt under the Trump presidency.
The conventional wisdom after the election was that Trump’s policies would give the US economy at least two good years of growth, and that financial markets would follow suit, before inflationary and debt pressures clouded the outlook. The gold price seems to be telling us that we have not even got that much leeway and that financial uncertainty could begin to weigh a lot sooner.
A trip around the gilded bling of Trump Tower tells you that the president just loves the yellow metal. But maybe gold just does not love him.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai