One of the more curious features of the recent increase in market volatility is that gold prices have only risen by a relatively small amount. The chart below from Sharepad shows the recent uptick over a two year period. Gold is traditionally seen as a safe haven for worried investors but to date we’ve only seen an increase of less than, 5%, to a recent high of just under $1240 an ounce.
The recent strength of the dollar clearly hasn’t helped as there tends to be an inverse relationship between gold prices and the greenback. Also, it’s worth noting that traditional sources of demand for physical gold – India and China – have both failed to provide much of a catalyst on the upside. And I think that it’s that last word that is crucial here – where’s the catalyst for higher demand going to come from in the next few months?

We don’t seem – quite yet – to be tumbling into a recession and the dollar seems attractive as a safe haven. Trump hasn’t nuked anyone (yet) and US Treasury Bonds seem attractively priced. Again, where’s the catalyst for increased demand? There’s also a strong argument for suggesting that the recent decades long rally in gold prices might have come to a grinding halt.
Matthew Turner at Australian bank Macquarie suggests that in fact gold embarked on this rally in the early 2000s because of major shifts in demand. Talking to one gold news website he suggested that “Central banks started buying gold after being net sellers, investors were buying investment gold through newly launched exchange traded products, and the Chinese started to build its gold exchange…These were three major factors that fundamentally increased demand for gold. Right now, we see the supply demand outlook as a little bit soggy. We just don’t know where the next big catalyst for gold is going to come from”. If Turner is right, we might see gold prices becalmed in a trading range between $1200 and $1300 an ounce, until we see a decisive shift in the global economy. More to the point, if we do see a big increase in volatility my gut tells me we could see gold prices move well above $1500 and possibly even challenge $2000 if Western Capitalism suddenly looks threatened.

Chart – A strange funk for gold prices