Financial Analysis of Gold Market – August 2017

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The price of Gold is rising amid Trump – N. Korea concerns, jumping to 8-week highs. After news broke that both Trump and Kim Jong Un are willing to use their nuclear power against each other’s country, gold prices have rallied more than 2% this week. Gold is trading at the highest level in two months, and looking to crack the $1,300 level for the first time since the day after Trump’s election as the US President.

Bubble size represents market cap

FIGURE 1: PERFORMANCE OF GOLD MINERS

Description: Figure 1 highlights the performance of the gold mining industry for the month of July 2017 (x-axis) and the performance of the 11 months prior to July 2017.

Another major risk knocking on our door very soon (next two months) is the risk of Congress failing to raise the debt ceiling. It will be very challenging for Congress to pass legislation in this regare. Getting any bipartisan agreement on a bill seems challenging as both parties are polarized in their decision making, to say the least. Even if House Speaker, Paul Ryan, and House Minority Leader Nancy Pelosi, were to assemble a special coalition to negotiate a legislation, it would put the House Speaker’s job at risk with the conservative Republicans who oppose any such increase. This scenario may likely be a supporting factor for a gold price increase.

Meanwhile, Russia continues to add to its gold reserves. Stated in its regular monthly statement of gold holdings by the Russian Central Bank, Russia added 9.33 tons of gold in June. This brought Russia’s current holding to 1,716 tons – the sixth largest national holdings in the world, as reported to the IMF. Russia continues to close the gap with the official figure disclosed by the Chinese Government, of 1,842 tons.

Since it is earning season, our newsletter wouldn’t be complete without speaking about the gold miners and their earnings reports. Across the board, higher gold prices have helped gold miners handily beat 2Q17 earnings expectations. Barrick, Newmont, Goldcorp, Kinross, Detour Gold, Alamos Gold, and Agnico Eagle, all reported better than expected earnings and some even suggested that they had produced more gold than expected while lowering their costs.

Investors tend to flock to safe haven assets such as gold (and the dollar, yen, and treasuries) during periods of uncertainty and rising geopolitical tensions. However, investors need to be cautious. As the saying goes “buy the rumour, sell the fact”, the price of gold tends to rise in anticipation of conflict but often falls when war breaks out. So, while uncertainty around the current US – N. Korean situation continues to evolve, gold prices look well supported to continue their bull run.