Gold – A Perfect Storm for 2019

The comments below are an edited and abridged synopsis of an article by Alasdair Macleod

The world is awash with dollars at a time when markets act as if there is a shortage. But the dollar has the potential to fall substantially against other currencies, leading to a rise in the price of gold.

Gold – A Perfect Storm for 2019 | BullionBuzz

In Asia, the move toward gold and against the dollar accelerated in 2018, with Russia having replaced the dollar with gold as its principal reserve currency. China has laid the foundation with an oil-yuan futures contract, which can be a bridge to yuan-gold contracts in Hong Kong and Dubai. This is a direct challenge to the dollar as a reserve currency, and likely to be attractive to oil suppliers (Iran) seeking to circumvent use of the dollar and accumulate gold instead.

America’s trade war against China appears to be less about unfair trade practices and more about stopping China from evolving into a serious technological competitor against the US. In 2019, there is a strong possibility the tariff war will escalate into a wider conflict, with China selling down its exposure to the dollar and US Treasury debt. That would create significant difficulties for the US government and for the dollar.

With the credit cycle turning and the addition of US tariffs, markets are at a risk of replicating the 1929-32 crash and the economic depression that followed. This time, instead of commodities and consumer products effectively priced in gold, they will be priced in fiat currency. Monetary policies will ensure liquidity is freely available to support the commercial banks, government spending and economic activity. This is a recipe for higher gold prices.

Demand for physical gold continues to outstrip mine supply. In 2019, risk-weighting rules in Basel III open up the opportunity for commercial banks to augment their liquidity with allocated bullion, attractive to euro- and yen-based banks that face negative interest rates on short-term cash alternatives.

The technical position in the paper markets looks favourable, with close to record levels of bearishness, and an established pattern of December rallies in the gold price.

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