Last year, the price of gold stood at $1,156 on the 31st of December. Today, the price is inching towards the $1,300 mark. Gold gained about13% in 2017, the best it has done since 2010. There were a couple of things that were in the way but despite those headwinds, gold has performed remarkably well.
You cannot talk about the price of gold without talking about the US. The US dollar and the US economy and politics invariably affect the economy of the rest of the world. They drive the global price of commodities like gold. There are a few major themes that drove gold in 2017 and they are: Geopolitical risk, debt, American politics, the weakening dollar, the US Federal bank, the stock market bubble and cryptocurrency.
#1. Geopolitical risk
Geopolitical tensions have always existed so much so that they have become the new normal. In 2017 the focus was the tension between America and Kim Jon Un’s North Korea. However there have been other global risk factors like the tensions between the US and Russia uncertainty over Brexit, talk of secession in Catalonia, the ongoing war in the middle east, the Zimbabwean coup and more.
Geopolitical turmoil has always been good for god as more people buy the yellow metal to hedge against risk. With geopolitical tensions being so high, the price of gold should have gone even higher but analysts believe that people have become desensitized and turmoil is accepted as the new normal.
The US Federal government has massive debt but it keeps spending money it doesn’t really have. Just last month the government spent $139 billion more than it had as revenue. That’s like spending money you don’t actually have like a normal person would on a credit card. The total national debt is over $21 trillion and growing. This is about 105% of the country’s total GDP.
The government isn’t the only one in debt, US household debt and Corporate debt have also risen this year. The one country that should be coining it. China has a bigger debt problem. If China collapses under its debt burden so will the rest of the world. Analysts believe that the next economic crisis will be triggered by the credit market.
#3. American Politics
Donald Trump’s presidency got off to a difficult start. The administration failed to repeal Obamacare twice. The president was also dogged by talk of Russian Collusion and the Robert Muller investigation. The only victory the Republicans had was having the tax package passed but even that brings more problems. The tax relief tpdies not bring government relief instead it will put an extra $1.5 trillion to an already ballooning national debt.
#4. The weakening dollar
This year, the dollar index fell by more than 9%, the biggest annual slide since 2003. The ballooning debt also has an impact on the dollar. Tax cuts mean the government needs to find money elsewhere but where? From the Federal bank of course which means the dollar will fall even more.
There is also an effort by some major economies to de-dollarise. At the beginning of this year China announced their yuan-denominated oil futures contract that is backed by gold. This means oil exporters can circumvent the dollar and use the Chinese currency as a trading benchmark. The gold-backing means that although the oil will be priced in yuan, buyers can use gold. Russia has also made moves that suggests it’s looking for alternative to the US dollar. China and Russia have been buying massive amounts of gold which suggests that they are really serious about changing their trading system.