TOKYO -- Many in the market say gold is primed for a climb despite looming hikes in U.S. interest rates, betting that geopolitical risk trumps a chance for better yields.
Gold for February delivery traded in the lower half of the $1,180s per troy ounce early Friday in New York. Investors had on Tuesday bought the metal up to a roughly two-month high above $1,220, seeking shelter following the previous week's news that the U.K. will leave the single European market when exiting the European Union. But selling has predominated since, with a strong dollar and the Dow Jones Industrial Average's historic close above 20,000 apparently putting traders' minds at ease.
In one sense, gold behaves as a currency, though it is not tethered to any particular nation. The metal has traditionally been viewed as a substitute for the dollar, and its price tends to fall when the greenback strengthens, and vice versa. Gold also plays the role of the ultimate safe asset, used to guard against an economic downturn or a plunge in interest rates.
The U.S. Federal Reserve took its rate hike expectations up a notch in December, from two increases in 2017 to three, citing a strong American labor market and rising prices. Under ordinary circumstances and standard market thinking, this should curb gold's climb. But many players now suspect that the metal still has room to rise.
The reason, according to Tokyo-based market analyst Itsuo Toshima, is "uncertainty, as exemplified by the [Donald] Trump administration's policies in the U.S."
Economic policies are of particular concern. The new president has pledged to plow more than $1 trillion into infrastructure over a decade as part of a plan to revive American manufacturing. But "using fiscal spending to bolster an already-robust U.S. economy calls up the specter of inflation," said Naohiro Niimura of Market Risk Advisory.
Inflation generally brings to mind rising interest rates. But should the market suspect that inflation will outpace rate hikes, investors could flock to gold for protection, Niimura said.
Instability in the Middle East is a second source of uncertainty. Trump has shown a strong affinity to Israel and vowed in his inaugural address to "eradicate" radical Islamic terrorism "from the face of the Earth." If tensions in the region climb, gold likely will, too.
The rise of populist political forces in Europe could further burnish the metal's appeal. The Netherlands faces a general election in March, while France will pick its next president in a two-round election spanning April and May. German parliamentary elections are coming up this fall. Should far-right parties find popular support in any of these countries, investors could take shelter in gold amid alarm over European upheaval, according to Yuichi Ikemizu, manager of ICBC Standard Bank's Tokyo branch.
Trump has already moved to keep some of his hard-line campaign promises, such as withdrawing the U.S. from the Trans-Pacific Partnership trade agreement and building a wall along the Mexican border. If this continues, risk-averse investors could keep seeking out their favorite safe haven, eventually sending gold as high as $1,350 or so.