Why gold price faces more headwinds
Ankara-Turkey (Sept 2) Bulls are eyeing the Turkish lira crisis and rising geopolitical risks. Gold tracked a rapidly declining trend from mid-July on the back of thinner summer trading and a stronger USD. The precious metal has been trending down since April, falling around 12 per cent from 2018 highs.
It appears that the bears have it all their way at the time of writing. Spot gold dropped through the $1,200 floor, fast headed for $1,180 and possibly lower unless the bulls find reason to buy the precious metal. Bargain hunters and bulls alike are eyeing the Turkish lira crisis and rising geopolitical risks amid US economic sanctions on Turkey, with some arguing that gold has bottomed and may start rising on these additional threats. I'm not so optimistic about gold's short-term course.
It's true the collapse of the Turkish lira spread ripples of fear through the European Union (EU) sovereign bond and banking sectors. If the USD had been weaker, investors might have seen gold as a safe haven. As it stands, USD-denominated assets are more attractive given strong growth in the United States. The yen and Swiss franc are also attractive, giving Japan and Switzerland stronger purchasing power and more expensive exports.
Then again, the turmoil over Turkey isn't over yet. Ratings cuts followed on the basis that Turkey's political landscape is unstable, government debt is too high and gross domestic product (GDP) is dwindling. Standard & Poor's forecast a recession in 2019 because the lira has lost more than 40 per cent of its value since the beginning of the year, meaning much weaker spending power and investment sentiment.
Turkey's role in the EU's bigger economic picture is limited except for the bloc's banking sector's exposure to the country's debt markets. These are currently under heavy pressure from higher interest rates and a flow of investment towards USD-denominated assets and away from emerging markets. To put it mildly, Turkey's government has overspent and holds a lot of debt at a bad time for emerging market investment.
In addition, the geopolitical risks are heating up over disputes between the US and Turkey, which are moving rapidly from alliance to confrontation over a host of issues. Trade tensions, political tensions and defiant rhetoric from the countries' leadership are escalating and may even result in more economic sanctions on Turkey, meaning more pressure on GDP growth.
It's all pointing towards safe-haven attraction and yet gold weakens still further. Perhaps the reason lies in the trimmed expectations of growth in emerging markets. China and India are traditionally the biggest consumer of physical gold. If consumer spending power and demand fall along with their currencies, the gold price faces more headwinds.
The emerging markets are fraying in the current robust global economy, judging by Turkey's case. If the situation is contained by interventions from central banks and international bodies such as the International Monetary Fund and EU, it's possible the balance won't tip towards a slowdown. In the case that it gets out of control and contagion spreads to the global economy in the long run, gold may return to its throne as the king of safe havens.
KhaleejTimes
