Analysts Say Win-Win Situation is Forming for Gold

Despite the dollar's recent gains, ScotiaMocatta sees gold recapturing its haven appeal.

In the latest edition of ScotiaMocatta's monthly Metal Matters report, the bank's analysts examined gold's prospects amid various geopolitical escalations. After falling for much of 2017, the U.S. dollar managed to rebound in December and has since attracted the attention of safe haven-oriented investors.

According to a recent article on Kitco, ScotiaMocatta sees gold eventually winning against the greenback and recapturing its haven appeal. A notable part of gold's tepid summer was a lack of response to risk factors that would otherwise warrant a price boost. But now, with a clear bottom forming on the chart, the analysts are certain that gold will receive its long-overdue benefits from the myriad of risks on the horizon.

Among them is a well-publicized tariff battle between the U.S. and two of its main trading partners in China and Canada reports Kitco. The Asian nation has seen over $200 billion of its exports to the U.S. incur higher levies and has pledged to retaliate in kind. Meanwhile, Canada finds itself facing a possible exclusion from the trillion dollar-worth Nafta agreement, which would greatly complicate trade with its U.S. and Mexican neighbors.

Iran has also been a source of concern, as the country saw its economy placed into question by sanctions imposed by the U.S. over nuclear disagreements. The situation will likely worsen towards the end of the year says Kitco, when further sanctions are scheduled to take place.

ScotiaMocatta also expects flare-ups in emerging markets to make an impact on gold's price, noting that the strength of the dollar has highlighted the weakness in various emerging economies. According to the article, the recent economic upheaval in Turkey has taken center stage, with the country experiencing a hyperinflation scenario similar to that of Venezuela. The presence of several European banks in Turkey raised concerns that the crisis could spread across the entire eurozone as well as complicate the region's handling of migrants. The analysts listed Argentina, South Africa, Russia, Brazil and Italy as other potential sources of risk, whether due to issues with their respective governments or those stemming from U.S. interference.

To ScotiaMocatta, this is a win-win situation for gold, as renewed safe-haven demand will be further strengthened by lower price levels. Likewise, emerging market crises could make the world's leading central banks, including the Federal Reserve, hesitate to continue applying their tightening policy writes the article.

The bank listed $1,241 an ounce as a key level to watch out for in the gold market. According to the analysts, a holdout above this threshold, coupled with any sign of weakness in the dollar, could trigger an aggressive price rebound in the metal as funds rush to cover their positions.

Why Iran Should Go For Gold

Forbes contributor Steve Hanke sees gold as an optimal solution for Iran's economic problems.

As Iran toys with the idea of a change in currency, Forbes contributor Steve Hanke refers to the slated reforms as nothing more than "a great illusion". According to the bill passed by Hassan Rouhani's government last December, Iran's national currency would be changed from the rial to the toman. This would also require a reduction of Iran's unit of account, since one toman equals ten rials.

Hanke states this is merely another cog in the engine of Iran's economic dysfunction, a problem that has persisted since the Islamic Revolution of 1979. Since then, the rial has officially lost 99.8% of its value as the country continues to struggle with high inflation. Although official figures place the annual inflation rate at 9.6%, Hanke estimates it closer to 20%.

The article clearly shows that something needs to change with Iran's economic system. Adopting a foreign currency such as the U.S. dollar or the euro would be one way to fix the currency issues, but Hanke points out the solution is politically unacceptable.

And while it might seem that there is no easy fix to Iran's economic problems, Hanke believes that the optimal solution is simple and unjustly overlooked: a return to the gold standard.

The article states that the reintroduction of gold as currency has been a talking point for some time now – going back as far as 1997, Nobelist Robert Mundell predicted that the yellow metal would return to its role in the international monetary system in the 21st century. Hanke notes that, since President Nixon abolished the gold standard in August of 1971, many have described the international monetary regime as a chaotic non-system.

Out of the various methods of implementation, Hanke sees gold-based currency boards as the most prudent choice – currency boards have been implemented by over 70 countries and have generally contributed to the fiscal discipline, price stability and growth rates in related countries.

The gold currency unit issued by this board would have to be fully backed by gold and fully convertible to gold at a fixed rate on demand, rendering it immune to manipulation. Hanke outlines a proposition that includes the creation of a Swiss-based Iranian board whose purpose is to issue coins and denominations while maintaining enough bullion to allow convertibility.

The proposed board would be unable to increase liabilities without appropriate backing by gold or foreign exchange notes the article, and it would also be independent from the financial obligations of Iran's government.

As Hanke explains, a gold-backed solution is elegant enough to be accepted by the Iranian government without appearing as a concession. Whether such a system is adopted remains to be seen, but there is little question that it would be more effective than the inconsequential reforms suggested by Hassan's government.

Trump's War Position Poses as Big Reason to Own Gold

Unlike his predecessors, Trump shows lack of hesitation in waging war against North Korea.

As far as MarketWatch contributor Howard Gold is concerned, Donald Trump is the biggest friend gold bugs have had since President Nixon decided to abolish the gold standard in 1971. In a recent article, he writes that the reason for this lies in Trump's lack of hesitation to wage war, even nuclear war, against North Korea, as opposed to focusing on diplomatic solutions.

Trump's recent statement towards Secretary of State Rex Tillerson, in which the President said the latter is wasting his time trying to negotiate with the Asian nation, serves as the perfect example of his battle-ready stance says Gold.

He compares Trump's feud with North Korea's leader Kim Jong-un to the President's goading of rival candidates during the 2016 presidential race. However, the implications are far greater: not only does Kim command a nuclear arsenal that many think poses a serious threat to the U.S., but some also fear that the totalitarian leader might be dangerously unstable.

Gold notes that Trump's predecessors showed a willingness to negotiate with North Korea, aware of the danger that the country could pose if provoked. Trump, however, seems ready and willing to engage in war.

The article also states that the way the current President is handling Iran – another country with a developing nuclear arsenal – also raises concerns. According to Trump, the Iran nuclear agreement, which was designed to keep the Islamic Republic's nuclear weapons under control, is "one of the worst and most one-sided" deals ever – he went as far as to say he'd declare Iran out of compliance with the agreement, despite his own administration confirming the opposite.

Trump's back-and-forth with North Korea's foreign minister, with neither party showing a willingness to back down from the notion of war, only added fuel to a fire that could engulf several nations and plunge them into conflict on an unseen scale.

According to Howard, there is currently no better argument to own gold than Trump's stance. He warns that the risk of war is far greater than either Wall Street or Trump's supporters would like to admit, placing the chance of conflict on the Korean peninsula between 25%-50% and the likelihood of nuclear war in Asia between 10%-20%. He suggests, with odds like these, allocating at least 5% of one's portfolio to physical gold is the safest decision one can make. Bullion won't prevent a cataclysmic event from happening, but it's going to serve as insurance during a time when it's needed most.