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5 Reasons The Drop In Gold Prices Shouldn't Worry Investors - Constable

5 Reasons The Drop In Gold Prices Shouldn't Worry Investors - Constable

Release Date:  Friday, June 22, 2018

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Gold and Silver Prices

Gold gained some positive traction on Friday but ended the week lower overall as the dollar gained some momentum. A possible trade war continues being a likely key factor for higher gold price as does possible inflation.

"Gold built on overnight rebound from six-month lows and continued gaining some positive traction through the early European session on Friday.

"The US Dollar extended overnight retracement slide from 11-month tops and was seen as one of the key factors underpinning demand for dollar-denominated commodities - like gold.

"Adding to this, growing concerns about a full-blown global trade war, especially after the EU slapped retaliatory duties on multiple American products worth around $3.2 billion, was cited support for the precious metal's safe-haven appeal." ("Gold clings to modest recovery gains, around $1,270 level," Haresh Menghani, FXStreet, 06.22.18)

Gold ended the week down $13.10, closing at $1,268.90. Silver ended the week down $0.15, closing at $16.42.

5 Reasons The Drop In Gold Prices Shouldn't Worry Investors - Constable

"Gold prices took a hit at the end of last week, and it has some observers concerned.

"But the truth is it shouldn't be worrying. Here's what you need to know: The price of bullion fell more than $20 a troy ounce between Thursday and Friday, hitting a low around $1,279.

"News reports declared, "Gold Solidly Down [...]" and "Gold Prices Take 2% Hit [...] Fresh 2018 Lows."
"Here's why gold investors shouldn't worry.

  1. A 2% move in a day isn't much. If the price fell that much every day for an extended period, then losses would quickly mount, but so far we aren't there.
  2. Gold prices mostly move down when the dollar gains strength. And it has been strong since January against the world's other leading currencies such as the Japanese yen, the euro, and the British pound… the upward movement in the value of the dollar is overwhelmingly responsible for the price moves. This relationship usually works vice versa as well.
  3. When gold prices do poorly, then other investments tend to do well. For instance, over the two decades from 1980 through the year 2000 the price of bullion dropped from a high of $850 an ounce down to less than $300. Meanwhile, the S&P 500 index rallied more than 1000%, not including dividends, according to data from Yahoo Finance. That more than a 10-fold increase.
  4. Gold is still useful to own during times of market stress. That's true even though we aren't there now. During the 2008-2009 financial crisis, there were periods when certain securities couldn't be sold. An example of that is the market for auction rate auction rate securities, a type of bond.  If you owned those notes during that period, then you couldn't sell them no matter how low a price you offered. However, the market for gold never dried up. There were always ready buyers for the metal…
  5. The fact that gold prices move up and down is one of its attractions for investors. Just like other investments, the price of gold changes from day to day. However, those price movements don't tend to correlate with the changes in the value of stocks or bonds. When share prices drop then gold prices might move up down or remain unchanged. That lack of correlation helps to diversify a portfolio. Better still, when looked at in combination with other investments, adding gold can reduce a portfolio's overall volatility. For investors, risk and volatility are the same thing. Lower volatility is tantamount to lower risk.

"…If you own gold and are worried that prices may drop then think about why you purchased it in the first place. Most veteran investors say that they own it for one of the following three reasons: To help with portfolio diversification, or as a hedge against the declining value of paper money, or as insurance that you'll always be able to raise cash by selling some of the metal." ("5 Reasons The Drop In Gold Prices Shouldn't Worry Investors," Simon Constable, Forbes, 06.18.18.)

Gold likely to come out of slumber; these 3 factors can boost prices - Hirani

"Gold has fallen into a sleep since the middle of May. So far this year, the precious metal has been consolidating, as it has flatlined near the $1,300 level. But there are certain factors that are pointing that things are about to change for the commodity…

"We believe the lack of direction is the lull before the storm. In my last article, I pointed that gold speculators are at record short, even though we are not seeing any selling pressure in the price of gold…

First factor: Rise in inflation

"The inflation is rising in the US and other global economies. Crude oil is the primary factor which is driving the inflation up. Copper is also trending along nicely on the upside. The base metal is the leading indicators, which diagnoses the health of a global economy…The five-year real yield is at 0.74 per cent…and is constantly rising. This is the indication that inflation expectations are rising and five-year TIPS (Inflation protected securities) are getting more expensive versus a nominal treasury.

Second factor: Trade wars

"The US President Donald Trump is hell bent on protecting the American interest and rolling out tariffs as weapons to renegotiate existing trade agreements with partners around the world. The potential of trade war is increasing and now the US is taking on the G7. It is already at the loggerheads with China, and is now ruffling the feathers of its allies -- Canada, Mexico and the European Union.

"In response, retaliations have started against agri producers in the US. We may see tit-for-tat from other countries, which will eventually lead to the trade war and distort prices around the world (again which will increase inflation).

Third factor: US' mounting debt

"The United States had a Federal Budget deficit of $146.8 billion in May, which brings the total over the trailing eight months of the 2018 fiscal year to $532.2 billion. The deficit is not expected to shrink, as trade wars will put cap on the US exports (Other countries are on the way to implement trade tariffs against US).

"The recent tax cuts and increase in spending is expected to stretch the deficit. The Congressional Budget office's recent projection points to increasing deficit over 10 years.

"International sentiment has already started to turn against the US Dollar. Russia, China, Turkey and other emerging markets have started accumulating physical gold…We would like to take contrarian call as at some point investors will start realizing the true value of gold based on demand and supply and not suppressed by derivatives." ("Gold likely to come out of slumber; these 3 factors can boost prices," Aasif Hirani, Economic Times, 06.20.18.)

Gold Can Climb As Fed Hikes- RBC Capital Markets - Golubova

"Federal Reserve's rate hikes are not "be-all and end-all" for gold prices, said RBC Capital Markets, projecting to see gold significantly climb next year as investors start to take market uncertainties seriously.

"Conventional assumption that rising rates are negative for gold does hold, but Fed's rate increases are just an obstacle, not the main driver for the yellow metal, said RBC's commodity strategist Christopher Louney.

"'This comes back to the idea that rates are a headwind and not the be-all and end-all. So even if we do get these rate increases this year and throughout next year, gold prices can still climb on the back of it given a number of other factors at play,' Louney said in a video posted on RBC Insights page this week.

"The relationship between higher rates and gold is not a symmetrical one, which means that not all increases or decreases in rates will translate into equal increases or decreases in gold price.

"The last rate hike in 2018 is not entirely priced in yet, which could lead to lower gold prices in the end of the year, Louney noted but added that 2019 will be a much better year for the precious metal.

"'In our view gold will average $1,307 in 2018 and $1,351 in 2019. We term this a cautiously constructive view,' he said. 'There are a number of macro headwinds at play, there are buoyant equity levels, dollar off its lows and rising rates. However, these are just headwinds.'

"Investors must remember that gold prices have 'some underlying current' behind them, which will boost the yellow metal's level to $1,351, according to RBC's analysis.

"'We do think the risk is skewed to the upside given the proliferation of uncertainty in the market and a number of uncertainties that are just out there,' Louney said.

"On top of that, the markets will begin to view global uncertainty as a serious threat next year. This will be a significant shift in market sentiment, as most of this year's risks had little impact on gold because traders were not shaken by any geopolitical tribulations.

"'While the market has become skeptical of uncertainties, we do think there is scope for skepticism to subside and for people to really appreciate the uncertainty in the market and for that to really filter through to gold prices overall,' Louney pointed out." ("Gold Can Climb As Fed Hikes-RBC Capital Markets," Anna Golubova, Kitco News. 06.21.18.)

Good Times Are Over: Recession Coming In 12 Months- David Rosenberg - Lin

"Financial markets are about to reach an inflection point reminiscent of 2007, said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.

"At the Inside ETFs Canada conference in Montreal, Rosenberg said that equities markets have peaked following a year of rallying across all asset classes.

"'This has not happened in at least five decades,' Rosenberg said on Thursday, speaking of 2017's bull market run in which even assets that were traditionally inversely correlated with one another rose in tandem.

"The S&P 500 reached an all-time high earlier in the year in January, and currently trades at a price to earnings multiple (P/E) of 25. The historic average P/E has been 15.70.

"Rosenberg said that an imminent slowdown in the economy, followed by a decline in financial assets valuations, will be triggered by a hawkish Fed that still sees room to hike rates.

"The Fed has a 100 basis points to go, just to get to neutral, and they should be above neutral right now. So unless something breaks, front end yields are going up, and the yield curve is going to invert," Rosenberg said.

"The neutral rate, or normal interest rate, is the target rate set by the central bank that causes full employment and price stability.

"Historically, an inverted yield curve has signaled an inflection point in the monetary cycle and has typically predated a coming recession.

"Importantly, the economist said that the financial services industry will be unprepared for the coming storm.

"'Thirteen million people work in [the financial services] industry who have only seen half a cycle. They've only known economic expansion, they've only known a bull market, they've known zero rates, no inflation, globalization, and that central banks will have your back in every moment in time,' Rosenberg said. 'My thesis is that their world is being rocked this year,' he added." ("Good Times Are Over: Recession Coming in 12 Months- David Rosenberg," David Lin, Kitco News, 06.21.18.)

Commerzbank Sees $1,350 Gold, $18 Silver By Year-End - Sykora

"Commerzbank looks for gold to reclaim $1,350 an ounce and silver $18 by year-end on expectations that the U.S. dollar will start to give back some of its recent strength.

"Gold hit a six-month low this week as the dollar hit an 11-month high, benefitting from the divergence in U.S. and European monetary policy as well as European politics, the bank said. The Federal Reserve hiked U.S. interest rates again this month, while the European Central Bank said its benchmark rates would not rise until after the summer of 2019.

"'We regard its [gold's] current price weakness as temporary,' Commerzbank said, adding that 'gold should turn positive once the dollar strength starts to fade.'

"For starters, Commerzbank said further losses by gold should be limited since the market has already factored in two more U.S. rate hikes this year. Meanwhile, there are numerous risks such as international trade conflicts, political crises, the dispute over Iran sanctions and high-priced stock markets that could be ripe for corrections.

"Because the ECB at its last meeting essentially ruled out any rate hike before the summer of 2019, the sizeable interest advantage enjoyed by the U.S. dollar is likely to remain in place for the foreseeable future," Commerzbank said. "We have therefore lowered our price forecast for the third quarter to $1,300. We still envisage a gold price of $1,350 per troy ounce at the end of 2018.

"The Fed's signaled rate hikes will bring its interest rate close to a level that is considered neutral next year. The Fed is hardly likely to go much above this so long as the U.S. economy does not overheat. In the past, the market has tended to anticipate the end of the rate hike cycle considerably earlier. In 2006, the gold price began making noticeable gains already six months before the last rate hike. The debate on the approaching end to Fed rate hikes should drive gold up to $1,500 per troy ounce by the end of 2019."

"Should gold rise, silver is likely to follow, Commerzbank said.

"'We expect to see silver at $18 per troy ounce by year's end and at $20 per troy ounce by the end of 2019,' the bank said." (Commerzbank Sees $1,350 Gold, $18 Silver By Year-End," Allen Sykora, Kitco News, 06.22.18.)