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Low Gold Prices Offer Investors Opportunity to Hedge Risk and Uncertainty

Low Gold Prices Offer Investors Opportunity to Hedge Risk and Uncertainty

Release Date:  Saturday, July 28, 2018


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Gold and Silver Prices

Gold prices were largely range bound on Friday following release of the newest GDP figures but remained lower for the week on a stronger dollar.

Gold hit a one-week low on Friday as the dollar strengthened ahead of U.S. growth data and as an agreement between the United States and Europe eased fears of a trade war and dented appetite for safe-haven assets. The dollar rose to its highest in five days ahead of data expected to show the U.S. economy grew at a 4.1 percent annualised rate in the second quarter, after 2 percent growth in the first quarter...  '(Gold) is tracking the dollar, but the closest correlation right now is between gold and the yuan. Apart from that gold may also be (tracking) the potential impact a strong (U.S. GDP) read could have for interest rates and the dollar," said Ole Hansen, head of commodity strategy at Saxo Bank...." ("Gold at one-week low as dollar rallies and trade tensions ease," Reuters, 7/27/18.) 

Low Gold Prices Offer Investors Opportunity to Hedge Risk and Uncertainty - Motley Fool

Motley Fool contributor Matt Smith wrote that gold's current low prices is providing investors with the opportunity to hedge against risk and growing uncertainty.

"Gold has dropped sharply in recent weeks because of a stronger U.S. dollar and an ongoing global economic recovery, which has seen central banks move to normalize monetary policy and increase interest rates. While the economic outlook is positive, there are storm clouds gathering on the horizon. Trump's approach to trade, which has seen him place tariffs on a range of imports and threaten China, the world's second-largest economy, with up to US$500 billion in tariffs, poses a dire threat to global growth. There are also a variety of other economic and geopolitical threats that could derail growing global prosperity and even plunge the world economy into recession.

"These events would give gold a decent nudge, because during times of crisis it is perceived to be a safe-haven investment. For this reason, gold's latest pullback, which sees it down by 6% since the start of the year, has created an opportunity for investors seeking to hedge against rising risk and growing uncertainty...

"There is also the risk that higher oil could cause growth to slow while magnifying the headwinds created by a global trade war. Some economists and the International Energy Agency (IEA) have speculated that if crude trades at over US$80 per barrel for a sustained period, it would constrain economic growth and, combined with other factors, such as a trade war, could trigger the next recession. If any of these events occurred, it would give gold a solid leg-up, which could push it through the US$1,300-per-ounce barrier...." ("Is There Another Gold Rally on the Horizon?" Motley Fool, 7/26/18.)

Technical Chart Indicates Gold Likely to Rise in Next Three Months - U.S. Global Investors

Frank Holmes, the CEO of U.S. Global Investors, explained how a reliable technical analysis of gold prices indicate there is a 77% gold prices will rise in the next three months.

"Anticipate before you participate in the market. This is a classic piece of advice I like to give investors and have written about extensively in my CEO blog, Frank Talk. Financial markets are influenced by relatively predictable cycles and trading patterns, and by better understanding these we are able to react thoughtfully to headline noise or unexpected market developments ...

"Using an oscillator chart, let's compare the U.S. dollar to gold. I believe oscillators are vital to identifying the optimal time to buy or sell, and right now it appears that the greenback is overbought while gold is oversold.

"Looking back over five years of data, we've discovered that, historically, when gold exceeded two standard deviations above the mean, the commodity fell 51 percent of the time in the following three months. In contrast, when gold prices exceeded two standard deviations below the mean, it rose 77 percent of the time in the following three months. This is because gold is undervalued at this level ...

"Buying the laggards when the time is right could enable you to participate in a potential rally—and right now, that rally could be in gold, currently down 2.24 standard deviations...." ("Overbought or Oversold? Let These Mathematical Signals Be Your Guide,", 7/23/18.)

Fund Managers Moving to Gold - Hug

Peter Hug, director of Global Trading for Kitco, has noted that fund managers are moving into gold.

"There appears to be renewed interest in gold even though no fundamental changes have occurred ... inflows into ETFs have begun to accelerate. This is the vehicle used primarily by fund managers, and either they believe gold is cheap at $1,225 or they are becoming increasingly concerned of a 'tipping' event on the near-term horizon. Without making a political statement, one has to wonder about the chaos that swirls around the administration on a daily basis. Will this impact policy on trade, North Korea, Iran or the mid-terms. Does it make sense to add gold to your portfolio when one looks at the entire picture? It appears asset allocators are beginning to move in that direction...." ("Gold Is Attracting Fund Interest At These Levels," Kitco, 7/25/18.)

Gold is Undervalued - Black Rock

The portfolio manager for Black Rock's Global Allocation Team, Russ Koesterich, believes that gold prices are "cheap" making the yellow metal interesting to investors.

"Of all the asset classes, commodities, particularly gold, are arguably the most difficult to assess. They are generally the most volatile. Moreover, the lack of cash flow makes them difficult to value; as a result, commodities tend to trade more on momentum. With that as a caveat, it is worth asking the question: Is gold beginning to look "cheap"? ...

"Although commodities are notoriously difficult to value, there are ways to tease out an approximate range. As it applies to gold, one measure I've found useful is the ratio of the price of gold to the U.S. money supply, measured by M2, which includes cash as well as things like money market funds, savings deposits and the like. The logic is that over the long term the price of gold should move with the change in the supply of money...

"[C]hanges in gold prices have equaled changes in the money supply, with the ratio tending to revert to one. We can think if this as the long-term equilibrium ... Today, gold is trading at a ratio of 0.73, i.e. 27% below the equilibrium level. This is the lowest point since late 2016... U.S. inflation is still low by historical levels, but at 2.9% U.S. headline inflation is at its highest level since 2012. This supports the notion that gold looks relatively cheap. Based on this relationship, gold is approximately 10% undervalued...

"[B]ased on this metric gold is trading at the cheapest levels since the dollar last peaked in late 2016. To the extent it is even practical to discuss value and commodities in the same breath, gold prices are starting to look interesting." ("Why gold may be looking cheap," BlackRock® Blog, 7/22/18.)

Gold to $1450 in 2018 - Goldman Sachs

Investment bank Goldman Sachs issues a new report affirming its bullish gold forecast of $1450 by next year.

"Despite gold's recent lackluster performance, Goldman Sachs continues to see prices rising over the next year as demand in China and other emerging-market nations recovers. In a report, Thursday Goldman reiterated its forecast for the precious metal to rise to $1,450 by 2019. The comments come as gold hovers around last week's 12-month low; August gold futures last traded at $1,226.30 an ounce ...

"'The reason gold doesn't go higher in USD is that the Chinese retail consumer still dominates the Chinese investor, where demand likely remains strong," Goldman said. 'Accordingly, a return to a macro backdrop of renewed EM growth and a gradual reversal of EM FX [foreign exchange] keeps us bullish gold through the EM wealth channel. Our China team is confident that market concerns about a sharp slowdown in growth momentum should ease, and see USD/CNY returning to 6.40 over the next 12 months, consistent with our 12-month gold target of [$1450/toz]." ("Goldman Sachs Remains Overweight Commodities And Still Sees Gold At $1,450," Kitco News, 7/26/18.)