Geopolitical strife a boon for precious metals
In January, gold surged 8% in dollar terms, 11% in pound terms and a very large 16% in euro terms. January’s 8.4% gain for gold in dollar terms was the best month in terms of price gains in three years.
Thus once again, gold bullion performed its role as a hedging instrument and a safe haven asset in January as the outlook became decidedly more uncertain – particularly in the Eurozone.
Gold’s 8.4% gain in January is its largest single month rise since 2012. Figures released on Friday indicate that US GDP was down sharply to 2.6% in the fourth quarter of 2014, following a third quarter surge at 5% as low oil prices begin to take their toll on the shale oil industry and the sectors that depend on it.
Unless the U.S. economy begins to grow more robustly, it is unlikely that the Federal Reserve will be able to raise rates any time soon. This should support sentiment towards gold and lead to further demand.
Meanwhile, this morning came further confirmation that Europe as a whole has sunk into deflation – year on year prices declined by 0.6%. The chronically fragile European banking system cannot afford a prolonged bout of deflation.
Central banks, including the Bank of England, have been fighting this process since 2008 – with very mixed success. We now appear to have reached a tipping point.
If the economies of Europe cannot reverse the trend and generate sustainable economic growth, the process will begin to feed on itself leading to company failures, bank failures and contagion – the ramifications of which will almost certainly include bail-ins.
However, given the intensification of currency wars, where countries devalue their currencies to gain a competitive advantage for their exports, it is difficult to envision a scenario where European prices will rise in the short term.