Uncertainty in US, Europe put gold in driver’s seat

ANALYSIS: A convergence of geopolitical and political events is causing widespread concern across Europe and the US, and WA’s gold sector could offer some stability for investors.

Gold has been good for Western Australia as the state recovers from the shock of the twin falls of iron ore and oil. And if the mood of European and US investors is a guide, now is a perfect time for WA business to get greater exposure to gold, and for job hunters to see the industry as a go-to employer.

Much of that positive view of gold has been obvious for the past 12 months. What’s different is that the upward trend, which some analysts had expected to reverse, now seems likely to hold its course – with the price outlook trending higher, not lower.

Tipping where the gold price might get to over the next few years may be an impossible task, but it is worth noting that Deutsche Bank reckons $US1,700 an ounce is a target based on possible central bank restocking.

If that’s correct then the local gold price could rise beyond $A2,200/oz, easily an all-time record and high enough to trigger a scramble to get more old mines back into production, for new mines to be developed, and for spending on exploration to rocket.

The critical question, obviously, is whether the gold price can continue to rise, especially after the US moves to increase interest rates, perhaps as soon as December.

Offsetting the threat of higher US interest rates, which theoretically strengthen the $US and put pressure on gold, is a flow of bad economic news out of Europe and concerning political news out of the US.

The prospect of Donald Trump winning November’s presidential race is agitating financial markets because of his erratic behaviour and threats to end easy access to the US market for major trading partners such as China – an event that would cascade across the world.

In European financial centres, which I have been visiting for the past three weeks, there is little talk of Trump, largely because the region has bigger problems on its plate than the US presidency.

The big issues in Europe today (and all are positive for gold and WA) are:

• a refugee and migration crisis that has already forced a split in the European Union, with Britain voting to quit, and

• concern that the Dutch could soon follow Britain, and a growing worry that France might also decide it would be better on its own.

The political uncertainty unleashed by the Brexit vote is reverberating across region and threatening to have a greater impact on the EU than on Britain, with deep uncertainty evident about how Europe should react to losing its second biggest economy.

Britain, too, is gripped by a degree of uncertainty, but there is also a surprising level of confidence that the vote to quit the EU was the equivalent of picking up a get-out-of jail card – a view best demonstrated by the fact that the British economy is growing at an Australian-style 3 per cent while Europe is not growing at all.

The big issue, however, and the one stirring intense emotions is the refugee crisis unleashed by the war in Syria and a non-stop flow of African migrants into a region that has famously open borders (and now seems to wish it didn’t).

The migrant/refugee crisis should not be underestimated as an event with global consequences, a fact that the rich of Europe are acutely familiar with as they shuffle their portfolios in a way increasingly oriented towards safe havens, and that means Swiss banks (even with their negative interest rates), US Treasury Bonds, and gold.

London, my first port of call, showed little evidence of a post-Brexit vote slowdown. However there is concern about how the country will make the transition from a member of Europe’s inner circle to a small country on the global stage, a transition with which Australia, Canada and New Zealand are well placed to offer a helping hand.

France was different, with the mood dark after a series of terrorist atrocities and attempted attacks, including one planned for Paris’s centrepiece, the Notre Dame Cathedral, adjacent to where I was staying.

In the days after the latest attack, Paris slid deeper into a crisis of confidence that is being exacerbated by the sight of Syrian refugee families sleeping on the streets. ‘They’re not to blame’ is a common comment from Parisians, but one that is quickly followed by the questions of ‘who are they, and what do we do with them?’

Migration in a region with a central government that demands open borders, but with member states that want to control their borders, is the flashpoint in Europe and the prime reason why a slim majority of British voters opted to quit, even while knowing the risks involved.

The irony is that the Brexit vote has done more to shake Europe than it has Britain, and without a solution it seems highly likely other EU members will follow. That could lead to a global currency crisis if France tries to return to the franc, Holland the guilder, and Italy the lire.

In that situation, three reserve currencies pick up the slack as the owners of capital rush to preserve their wealth with euros being exchanged for Swiss francs, US dollars, and gold.

Even without a full-blown currency crisis around the euro, there is an obvious drift in Europe towards gold – a point made apparent during a day in Monaco and five days in the holiday resort of St Tropez.

It was there that a group of wealthy expat British residents fell back on two topics of conversation – their status in a Britain-free EU and gold, in its many forms, with a special status received for Australian gold producers and explorers.

Traditionally, British investors have been quick to take advantage of two financial forces during the early stages of an Australian resources revival – the impact of stronger commodity prices themselves, and the double-whammy of shifting money out of low-value pounds into higher-value Australian dollars.

Any regular visitor from Australia to Britain is a winner these days from the sharp deterioration in the value of the pound since the Brexit vote, just as any owner of pounds is keen to shift some wealth into a safer and stronger financial destination.

This revival of Britain’s old love affair with Australia is being kindled due to gold, with Australian gold shares offering exposure to the $A (which has risen this year when it was expected to fall), and gold, which has also defied its non-believers by rising rather than falling.

The question for anyone with an interest in the WA economy to consider is what could possibly change this remarkable turn of events.

Britain flying solo will almost certainly lead to a continued weakening of its currency, a trend that pleases the British government. Europe is stumbling towards an existential crisis, which will further weaken the euro, and rich investors are desperate to preserve their capital at a time of negative interest rates.

The conditions could hardly be better for WA’s gold industry, with a strong underlying gold price, a beneficial currency, the prospect of a greater inflow of foreign funds, and low costs thanks to the overflow of surplus goods, services, and labour from the slower iron ore sector.

If the gold industry wasn’t on the radar screen of local industry, service providers and investors, it should be, because gold has reclaimed its role as a WA economic driver with a strong future that looks a lot like earlier gold booms that saved the state in difficult times.