There’s one big financial story playing out this year. But you’ve probably not heard anyone talk about it.
Which is strange. Because it’s the primary reason that gold is fast approaching a crucial breakout point.
If it clears this point then we could see the gold price hit record highs in 2018.
I know that sounds like a big call. And I’m not saying this is what’ll happen. But I’ll explain how it might happen shortly…
First, let’s look at the gold chart to see what’s going on.
Source: Incredible Charts
[Click to open new window]
This chart shows the monthly prices of gold over the past ten years.
The two orange horizontal lines mark crucial levels of support and resistance.
As you can see, the price has broken a medium-term downtrend that has been going on since 2011.
This occurred at the same time the price broke through US$1300, which was the short-term resistance. It’s now approaching US$1370, which is a longer-term resistance point and therefore a more crucial price level to watch.
So, what’s going on with gold?
The most common explanation out there is the ‘flight to the safety’ argument. This reasoning says gold demand is being driven by the tensions in North Korea.
It’s an easy headline.
Especially when you get Donald Trump standing in front of the UN saying he will obliterate the country.
And it is partially true.
However, if you look at the US stock market — which continues to make new highs — no one really believes a war will happen. I think this line of thinking is a furphy in many respects with regards to the gold price moves.
Any traders who think any future easing of tensions will move the gold price lower could therefore be surprised if this doesn’t happen.
The best trades are usually when technical and fundamental analysis comes together. In other words, when the charts and the facts stack up.
I think that is what’s happening here. But most people are reading the facts wrong.
The real story behind gold’s rise — and the biggest financial story you’ve never heard of this year — is the declining US dollar.
This has been the worst year for the dollar against other major currencies since 1986.
The most popular explanations for this revolves around two key players; Donald Trump and the Federal Reserve.
Trump’s lack of policy direction or any sign of the promised fiscal stimulus as yet has in part softened the outlook for the dollar.
And the Federal Reserve is no longer among the major central banks tightening — or preparing to tighten — interest rates and monetary policy.
However, like North Korea and gold, I think these explanations mask a deeper reason for the US dollar weakness.
Instead the real reason is a potential shift away from the dollar as the currency of international trade.
There are big moves underway to do this.
Russia now accepts yuan — rather than US dollars — as payment for oil sales to China. But crucially these Yuan will soon be convertible to gold thanks to a new oil futures contract China are soon to introduce.
Venezuela and Iran are also keen to participate in this new system, in an effort to remove US dollar influence on their economies.
Saudi Arabia, the world’s largest oil exporter, has been courted by China to break an arrangement under which Aramco, its state-run oil producer, prices oil only in US dollars.
Chief Economist of High Frequency Economics, Carl Weinberg wrote:
‘The prospect of the world’s largest importers and exporters of oil pricing and trading crude in yuan is a big dollar-negative,
‘If oil trade moves to yuan, it will mean a potential loss of $800 billion per year in U.S. dollar transactions, and a similar reduction of $800 billion in re-cycling of petro-surpluses into U.S. dollar assets. That is not a pretty picture for either the dollar or U.S. securities in the longer term.’
US dollar in decline
The fallout from US political and economic turmoil over the last decade is starting to hit one of their most critical advantages.
The US dollar as the world’s go-to currency.
North Korea, interest rates and Trump are all smaller parts of this larger story. But the real story is that there is now the will — and the power — of Russia and China to make a break from the US dollar.
Or at least start the ball rolling in that direction.
The main beneficiary of any loss in the US dollar won’t be the yuan. And certainly not the Russian ruble!
It will be gold. Perhaps cryptocurrencies, as well.
But gold is a $7 trillion market and is a favourite of central banks, large fund and wealthy individuals. Cryptos, at a total valuation of only $140 billion, are simply not a large enough market to absorb any major inflows — yet!
If gold price breaks through US$1,370 it could indicate the start of a new long term uptrend. And this is why it’s rising.
As it approaches the crucial US$1,370 level, what happens next will be very interesting.
Editor, Money Morning