Market Insider

Gold pushes to $1,200 — and a much scarier world could keep it there

Futures Now: Gold hits 7-week high

The world's looking a bit scarier in 2017, and that makes gold a lot more appealing.

Gold futures for February temporarily crossed above the key $1200 per ounce Tuesday, continuing an upswing that started on Dec. 15, the same day the 10-year bond yield peaked just below 2.5 percent in the "Trump rally." After making a move to $1207.20, gold futures were at $1199.80 per ounce.

Beyond the usual fears of terrorism and Middle East conflicts, potential trade skirmishes — if not wars — loom, and global tensions are rising. Across Europe, a number of elections could give nationalistic parties more clout. In France, candidate Marine Le Pen has said the country would leave the euro if she is elected, and that would undermine all of the euro zone. Le Pen has gained a slight lead in the latest poll, but she is still seen as a long shot candidate.

"We think there's sufficient geopolitical risk and some of the more traditional reasons — tightening money supply, relatively low recycling levels. We have elections in Germany and France, so the geopolitical risk elements would not necessarily be just U.S.-centric. Also we're coming off a year, last year when emerging market physical demand was rather poor," said James Steel, chief HSBC commodities analyst. "Any kind of recovery from last year is going to be good news."

Analysts say the push above $1200 is key, and for some it may be the first step toward a $1300 high. But some analysts don't see a big push higher for the metal. Instead, they see steady buying interest keeping it higher this year, against the potential headwinds of a rising dollar and higher interest rates.

"If it weren't for the geopolitical risk, gold would have given us a different outlook," said Steel. He expects an average price of $1282 per ounce this year, within a range of $1120 to $1290 per ounce. "It's a steady climb. We're expecting a lot of vol, maybe resistance when we get the interest rate rises," he said.

The Fed expects to raise rates three times this year, and while many economists still expect only two hikes, the market is watching out to see if inflation could force its hand.

On the trade front, the U.S. Congress is talking about border taxes which would impose a levy on all imports coming into the country as a way to pay for corporate tax breaks. While that now just talk, Trump's declared plans to renegotiate trade agreements and impose tariffs could drive the dollar higher, a potential negative counterweight for gold.

Already, officials in China and Mexico have made noise about retaliating.

"The whole protectionism issue is quite bullish for gold," said Steel. "The whole trade system is based on reciprocity. One side does something. The other side does the other ... the questioning of decades old military and political alliances raises risk." Trump has criticized the UN and NATO, though his pick for defense secretary defended NATO in confirmation hearings Thursday.

Gold had its ups and downs in 2016, but analysts agree 2017 is fraught with more opportunities for trouble. Gold was 8.6 percent higher in 2016, after spiking above $1375 per ounce in the days after the U.K. Brexit vote to leave the European Union. While there were some major world events, like the U.K.'s vote to leave the European Union in June and a series of major terror attacks in Europe, gold did not hold its highs.

Marc Faber on gold

Then the election of Donald Trump helped drive it lower until mid December, as the dollar and U.S. yields rose on the view that his policies would be reflationary for the U.S. economy. Markets were disillusioned with the "Trump trade" Thursday, after the president elect failed to firm up his plans for tax cuts or stimulus but took a shot at the drug industry when he met with journalists Wednesday. Stocks sold off and Treasury yields moved lower.

A key level watched by technicians is $1204 per ounce, according to Marc Chandler, chief currency strategist at Brown Brothers. He said the next objective would be $1229, which is 50 percent of the retracement of the post-election decline. Support comes in at $1195, to $1200, but he sees the chart pointing to a higher price.

George Gero, managing director at RBC, said there are many pockets of concern globally that have been putting a shine on gold, and it could reach $1300 per ounce this year.

"Elections are coming up in France and Germany, and they could be problematic, worrisome. And then Turkey, where the Turkish lira went right through the intervention by their central bank. I think all over the globe we're starting to see interest in another asset that is liquid and convertible into other currencies. We're starting to see more interest picking up in gold on a daily basis," said Gero. The crumbling Venezuelan economy is another danger spot.

The concern about populist candidates moving forward in Europe raises concerns about not only the future of the euro zone but the global economy.

"What Trump and Brexit are leading to is a reversal of globalization that had been in place," said Jim Wyckoff, senior analyst at precious metals retailer Kitco. The uncertainty and economic upheaval would be a positive for gold, if the world moves in that direction.

Wyckoff sees gold moving even as high as $1400 in 2018. "I think in 2017, we're going to see more geopolitical risks that could shock the marketplace," he said. "Relations with China and Russia could change a bit. The market place better get used to the fact that [Trump] is no holds barred in his comments and twitter account."

An employee arranges one kilogram gold bars for a photograph in Bangkok, Thailand, on January 13, 2016.
Dario Pignatelli | Bloomberg | Getty Images

Chandler said while the markets are watching a number of key elections in Europe, the one he believes will be most problematic for the euro zone is the Dutch election in March.

"We've got the Brexit, the Trump election. What's the next point? I don't think it's going to be France. I don't think it's going to be Germany. I think it's going to be the Netherlands," said Chandler. He described it as a possible "canary in a coal mine." "The nationalist candidate is ahead."

French candidate Le Pen visited Trump Tower in New York on Thursday but was not expected to meet with the president-elect.

Not everyone thinks gold will hold its highs. "It's a little too far, too fast for me," said Kevin Grady, president of Phoenix Futures and Options.

"We're just a little bullish here. Open interest is up dramatically over the last week and a half. We're up about 40,000 new longs, but the interesting thing is it's just on the futures side, which makes me leery," he said.

He said the big exchange traded funds for gold are not participating yet, and their assets are below last year's levels. SPDR Gold Trust ETF GLD was trading higher on the day.

"The fact they're out and they're not along for the ride makes me skeptical," he said.