“When markets and the dollar are up, gold is down, right? So why is the yellow metal the asset of choice for 2016 and beyond?”
The demand for gold is not a fluke or a passing fad. The current red hot market is not being driven by any particular disaster or dangerous risk in other investment classes. Unemployment, as we commonly measure it, stands at just under five percent, the S&P 500 is near 2,200 and gas prices hover around $2.00 a gallon, depending on where you live.
In calmer economic times the price of gold would not be on fire like it is today, yet here we are. A close examination of the forces behind the precious metal’s recent strong performance will go a long way to understanding where prices are headed in the future.
Michael Mauboussin: Challenges and Opportunities in Active Management And Using BAIT #MICUS
Michael Mauboussin's notes from his presentation at the 2020 Morningstar Investment Conference, held on September 16th and 17th. Q2 2020 hedge fund letters, conferences and more Michael Mauboussin: Challenges and Opportunities in Active Management Michael Mauboussin is Head of Consilient Research at Counterpoint Global in New York. Previously, he was Director of Research BlueMountain Capital, Read More
Gold Prices Were Depressed
Anyone holding gold remembers the long price slide that started in late 2012 and continued through most of 2013. Many were stunned by prices we hadn’t seen since 2009. The peculiar aspect to gold’s down market was that there wasn’t any particular reason for all the selling. The dollar was running strong against other currencies in those days, and commodities in general were out of favor as big banks, which got caught manipulating commodity prices, scurried out of the business. A strong dollar, weakness in the commodity price market and the exit of the price manipulators all combined to put gold in a years-long funk that resulted in an oversold market for gold, silver, platinum and other precious metals.
Demand Shot Up
Record gold demand of 1,064 tons in the first half of 2016 is greater than it was in the midst of the 2009 stock market meltdown. So called “paper gold” ETF funds, which shed a lot of their physical gold inventory when prices declined, now have to scramble to keep up with demand.
The “Will They or Won’t They” Fed
The Fed’s going to raise interest rates! The Fed’s going to raise interest rates! Only the Fed didn’t raise rates, and by now a quarter-point interest rate hike has already been priced into the stock market and the gold market. Former Fed chairman Ben Bernanke is now saying that it’s unlikely the Fed will be able to raise interest rates anytime in the near future.
Gnawing Global Uncertainty
Continued fighting in Syria and the Middle East, the repercussions of Brexit and the U.S. presidential election are all feeding into an atmosphere of general uncertainty. Add to that the banking crisis in Italy and continued weakness in the Chinese economy. Everywhere investors look the news is depressing. It’s easy to see the appeal of liquid hard assets in such a troubling atmosphere.
Returns Not Worth the Epic Downside
The low-to-negative interest rate policies of central banks worldwide combined with systemic weakness in corporate earnings is keeping growth at a crawl. The bond market is too much cash chasing minimal returns. With any investment there’s risk, but it doesn’t take much danger to outweigh the meager returns we’re getting these days.
This is particularly true for those who may be older, for whom losses are more serious as there’s no time to make them back. If losing all you’ve worked for is your main concern, what’s the incentive to take risks chasing three or four percent? Especially since the last time the market really tanked we saw losses of thirty and forty percent. No one who lived through those days wants to go through that again.
In a climate of uncertainty and meager returns, preservation becomes the intelligent strategy. With central banks threatening the buying power of cash, and the stock market threatening the value of investments, it makes sense to hedge your wealth by converting a fixed percentage into liquid hard assets. Taken together, all those factors mean the gold bulls are going to be smiling for a long time to come.