The recent spate of back-to-back hurricanes in the US is expected to compound the economic damage of an already over-extended debt. As the stock market braces for a correction, traders are inclined to sell out of riskier stock markets and take refuge in safe havens like gold.
Although it will take months for the impact of the hurricane season to be apparent, investors are already losing appetite for risk and investing in secure assets as gold. This was evident from the figures leading up to the hurricane season this year. Gold watchers have seen this precious metal on a summer turnaround, spiking up to $1300 even as markets remained uncertain.
An 18-month gold chart: April 2016 - September 2017
The historical 5-year volatility of gold witnessed a brief 2016 July surge in the aftermath of the surprise Brexit vote. Gold prices rose sharply driven by macroeconomic uncertainty caused by the unexpected EU referendum. Prices peaked at $1372 in August but dived 7.63% in November 2016 to finish at a record low of $1133. Presidential pro-business policies buoyed the equity markets and strengthened the US dollar driving investors away from gold. Gold prices plunged by nearly 5 % to notch a record low of $1143 in early January 2017. According to a Forbes commentary, this can be “attributed to fluctuations in the investment demand for gold”. Another reason why gold prices remained under pressure was a strengthened dollar, which makes the commodity more expensive for investors.
However, the post-presidential-election unstable scenario brought back the sheen of gold. Since January this year, gold prices have been slowly rising along the $1200 mark with rates clinging to the $1260 - $1300 range. The US Federal Reserve’s interest rates hike of June, followed by July, resulted in the gold price dipping to a rock-bottom $1210. The end of July saw gold staying put at $1270. Since August, the sluggish trend of gold finally got over with a 4 % surge to trade at $1290. This trend continued despite hurricane warnings and the escalating US-North Korea tensions and a globally uncertain geopolitical landscape.
The significance of the gold price turnaround cannot be overlooked. It can be partly attributed to hedge investor wariness with the American and European economies, particularly the US, where debt-based assets are at an all-time high.
Usually, near-term losses to an economy are offset by a medium-term boost to growth, but with the US parliament functioning in silos and government support programs yet to kick-in amidst the political instability, private investment in rebuilding the economy has taken a beating. Safe investing in gold became the option.
What was seen prior to the hurricane weekend of Irma was an upsurge in the gold price as investors sought to take the safe route. As per Investing, “the dollar remained under pressure amid doubts over prospects for a third Federal Reserve rate hike this year”. With the U.S. debt ceiling talks getting postponed and a rate hike doubtful, the optimism on gold has kept up
The direct impact of hurricanes Harvey and Irma
A 7-day gold chart: 8 September – 15 September
According to The Street, “a $300 billion hit from hurricanes Harvey and Irma is likely to affect jobs, growth and inflation in the months ahead”. The U.S. dollar hovered near a two-and-a-half year low last Friday on the 8th September when the Irma touched upon Florida. The dollar index slipped to the lowest since January 2015, coupled with a two-year high jobless claims data, mostly coming from the hurricane-hit Texas.
After rising to a three-year high in August-September, gold prices took a hit on Friday. Soon after the weekend as the hurricane risk damage of Irma was downsized, gold prices fell with risks receding in the markets. As the stock market rebounded and the dollar joined the recovery, the double impact had “the gold prices reeling at this point of time” as per NASDAQ. The prices recorded a $23 drop touching $1328. This was a short-term effect. Recovery from threat perceptions of the double whammy of hurricane Irma and North Korea missile launch may have triggered the downslide of gold prices. The sudden optimism post Irma weekend and apprehensions of North Korea dwindling, helped the stock markets and the dollar to rebound and consequently the prices of gold to move lower
Gold Prices in Q4 after the hurricane season
The fall of gold prices post-hurricane weekend cannot be seen in exclusion to other situations plaguing America. The dip during the week till 13th can be seen more as a knee-jerk reaction. This weak trend will not last long as is evident from the recovery from 14th. The hurricane season will soon be over by the end of Q3 and so will the uncertainties revolving around it. The short-term status of dipping gold prices as seen this week is already witnessing a correction which will continue through Q4. Another reason why one can expect a high demand and buying to continue is the festival season across gold consuming countries.
Notwithstanding the market expectations in the US and Europe, gold can be expected to steady and rise. Even as this goes to print, the dipping price has stabled and recovered. Safe havens such as gold will continue to be in demand, with prices of the precious metal surging to a one-year high.
Gold is considered secure from an investment point of view to hedge against macroeconomic uncertainty. The GDX, as well as the currently over-valued stock markets, may be due for a correction shortly, which will again impact gold prices, causing another surge. According to the Forex Time market analysis, “Investors are likely to continue buying stocks with overstretched valuations because when compared to treasuries, they still look much more attractive”.
A three-month gold chart: July - September 2017
Presently, it appears that the gold prices will hold up during the Q4, despite unpredictability, as two constants remain – a weakening dollar and a low interest/credit position.
After the Q3 the gold prices can be expected to surge along comfortably till the end of 2017, although whether the Global Intergold prediction of 1,515 $ per ounce come true, it remains to be seen. The year 2017 will go down in gold history as the year of the breakout from the 6-year downward trend. The bottom line is that gold prices will be largely unaffected by the hurricane season in the mid and long-term. As Hubert Moolman suggests, the current situation for gold is similar to that of May 1979, when prices of assets like gold and silver soared while bonds and stock market collapsed. An event like a stock market crash is also likely to push many banks to that point of failure With the likelihood of such major monetary events around the corner, gold is likely to spike much higher over the coming 12 months.