Gold Rises Above $1,500 on Recession Fears

Gold shows no signs of slowing down as it hovers around six-year highs.

gold rises above $1,500

Gold is showing no signs of slowing down, having gained an additional 1% last Wednesday due to a series of favorable factors. In what is perhaps the most telling show of strength, the metal continues to hover around six-year highs during its traditionally weakest quarter.

According to an article on Newsmax, the most recent set of gains, which sent gold above the $1,520 level, was triggered by renewed concerns that the U.S. could be on the brink of a recession. Throughout the Federal Reserve’s tightening cycle which started in 2015, numerous analysts warned that almost every cessation of interest rate hikes in the past lead to a recession.

After an abrupt dovish shift earlier this summer, these worries intensified as the U.S. Treasury’s yield curved inverted, materializing yet another warning that experts have been issuing for months. According to Newsmax, movements like these are usually a tell-tale sign that a recession is underway, and the Fed seems to concur. Even before the yield-curve inversion, a Fed gauge placed the risk of a domestic recession happening in the next 12 months at its highest point since 2008, when the global financial crisis hit.

The latter point is especially prominent given various disappointing showings by key economies in the eurozone. Countries like Germany and France, both major producers, have seen a significant decline in their factory output in recent months, reports Newsmax. And, after hinting towards a hiking schedule of its own, the European Central Bank followed the Fed’s U-turn by slashing growth forecasts and alluding to potential monetary easing in the near future.

The eurozone’s GDP barely saw any growth during the second quarter, driven not only by disappointing economic data but also trade conflicts and Brexit-related complications. A no-deal Brexit, which initially seemed highly unlikely, is now looking increasingly probable as Britain’s parliament is unable to reach a satisfactory trade deal with the European Union as the October 31 exit deadline approaches. A hard exit from the EU would severely disrupt the British economy and likely have significant consequences on the rest of the eurozone.

Jeff Klearman, portfolio manager at GraniteShares, noted that different EU economies are now reporting negative growth, suggesting that an impending crisis could envelop the entire global market instead of just the U.S. Klearman also noted that, currently, gold doesn’t appear to have any headwinds worth mentioning as the metal’s momentum keeps building.

Newsmax reports that Tuesday’s trading session saw gold move as high as $1,534 an ounce due to geopolitical concerns stemming from Hong Kong and Argentina, while silver rose to $17.17 an ounce after hitting its highest level since January 2018.

As the U.S.-China trade war escalates further, investors have noted that China’s industrial output in July grew at its slowest pace in 17 years. On the domestic front, the markets are predicting a 68.8% chance that the Fed will perform an additional 25-basis-point rate cut in September to offset the effects of the trade war.

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Frank Holmes Sees $1,500 as Next Level for Gold

Experts agree that gold is heating up and silver could catch up.

gold silver 1-15-18-2

As gold was hovering around the $1,420 level earlier this month, some analysts pegged $1,443 an ounce as the next key resistance level for gold to break through on its bull run. But for Forbes contributor Frank Holmes, gold’s recent jump past $1,450 an ounce tells him that $1,500 is the next level that investors should prepare for, and that it may come sooner rather than later.

Like many, Holmes is acutely aware that central bank policies, in particular those of the Federal Reserve, have played a major role in gold’s breakout above six-year highs. According to the Forbes article, a mere hint that an interest rate cut could happen this month made by Federal Reserve Bank of New York President John Williams caused gold’s price to immediately jump 2%, leading to the first daily close above $1,440 since May 2013.

All eyes have been monitoring Fed officials and their actions since the central bank made a sudden U-turn some months back, signaling an end to their tightening schedule and potentially heralding an era of quantitative easing. The article notes that other central banks, in particular the European Central Bank (ECB), had similar dovish showings by both slashing their growth forecasts and suggesting rate cuts of their own.

Having broken out of a five-year trading range, Holmes believes that great things are in store for the yellow metal. According to the article, other pundits share his view that central bankers will continue to play a key role in gold’s run. A recent note published by analysts at research firm Alpine Macro stated that the Fed’s actions are setting the stage for a multi-year bear market in the dollar, which has thus far acted as one of the main headwinds for the yellow metal. Besides a weaker greenback, Alpine Macro’s analysts listed loose Fed policies and geopolitical risks as two additional ingredients necessary for a spectacular gold bull run, and both of those appear to be in ample supply. As the dollar pulls back, the firm expects gold to reach all-time highs in the next few years.

The World Gold Council likewise pointed out that lower interest rates will increase the investment appeal of gold, adding that gold’s returns become especially prominent in an environment of negative real rates, like the one that is likely to occur later this year. The Canadian Imperial Bank of Commerce (CIBC) underlined the importance of negative real rates, saying that this was the primary driving factor during gold’s last two bull cycles. When real rates delved into negative territory in the 1970s, gold’s price jumped by more than 320%, while the negative trickle during the 2000s caused gold’s price to move up roughly 400%.

Holmes also quoted Ray Dalio, a billionaire investor and longtime gold bug who recently reiterated that the global market is on the verge of a paradigm shift due to the unsustainability of loose central bank policies. Dalio had noted that most investors are underweight on gold and would do well to prepare for this shift by bolstering their portfolio with the metal.

Besides gold’s advances, Holmes was also enthused to see that silver prices are finally catching up. After much talk over how silver is historically undervalued compared to gold, the metal recently posted six straight days of gains, culminating in a 52-week price high.

Gold to Shine From Weak-Dollar Sentiments

Market strategist believes the era of the strong dollar is coming to a close.

gold bullish from anti-dollar trade

According to numerous analysts and strategists, gold’s outstanding performance over the past couple of weeks is representative of a bearish shift in the U.S. economy, starting with the greenback itself. Last week, the metal blazed past two strong resistance levels in $1,350 and $1,365 before stopping just shy of $1,425 an ounce reports a CNBC article, hitting its highest level in over six years.

Having himself been bullish on the U.S. dollar until very recently, Bannockburn Global Forex’s chief market strategist Marc Chandler believes the era of the strong dollar is coming to a close. Chandler notes that the Federal Reserve’s actions have expedited the process, citing both the rapid rate hikes and the sudden policy shift.

Indeed, after four years of persistently hawkish rhetoric, Fed officials made a complete turnaround in just a few months and are now hinting at prolonged monetary easing reports CNBC. As Chandler explains, this is bad for the currency and good for gold on a fundamental level, to speak nothing of traders’ sentiment in regards to the Fed’s signals.

Suki Cooper, a precious metals analyst at Standard Chartered Bank, noted that there is much more to gold’s breakout than just dollar weakness. According to the CNBC article, buyers have been coming in across the board, with inflows comparable to the post-Brexit panic of 2016. Like many others, Cooper took note of safe-haven appeal that has increasingly lured investors to gold ever since the tariff conflicts hinted towards a global recession. The possibility that the U.S. will take military action against Iran, as well as the issue’s polarizing effect on Washington, likewise has investors clamoring for safety.

Cooper added that central bank buying is also an ever more prominent tailwind for gold. Although central bankers have amassed bullion since 2010, the recent heavy ramp-up of purchases from the official sector points to both a desire to move away from the U.S. dollar and preparation for a potential crisis.

Mark McCormick, a foreign exchange strategist at TD Securities, sees gold as the safest anti-dollar trade right now. Whereas investors previously had the option to flee to other currencies like the euro, yen or sterling, CNBC reports all of them are looking particularly weak as of late, leaving traders strapped for options. While the G20 summit is still underway, most of the minutes gleaned thus far point to a continuation of this trend, with President Trump himself giving the nod to a weaker dollar.

The dollar’s recent strong run is usually tied to President Trump’s policies, yet Chandler notes that the bull run started during Obama’s presidency. A turnaround could therefore be momentous, with the strategist adding that gold could move to $1,700 if the dollar fulfills bearish expectations. Meanwhile, Cooper and her firm forecast a high of $1,440 an ounce for the metal in 2019. She noted that the outlook could further improve if the G20 summit affirms expectations of rate cuts as early as this summer.

Fund Manager Sees Prolonged Bull Market In Gold

Gold to emerge as a reliable asset and source of relief amid growing chaos.

gold a reliable asset

In a recent interview with Kitco, Incrementum AG’s fund manager Ronald-Peter Stoeferle spoke about what he views as a steady erosion of trust from all corners. Stoeferle, who was previously named Incrementum’s most accurate quarterly forecaster, thinks the stars are aligning for a prolonged bull market in gold, despite tepid summer price action.

The author of the annual In Gold We Trust report noted that a general lack of trust is becoming a common theme among both investors and the average citizen. Stoeferle said that people are beginning to doubt the veracity of the media, the prudence of geopolitical alliances and current monetary policies, and even democracy itself.

According to Kitco, in such an era, gold is bound to emerge as the one reliable asset and source of relief amid growing chaos. Stoeferle thinks that movement in the stock market perfectly illustrates the aforementioned point, as the fourth quarter of 2018 saw both small- and large-cap stocks drop by double-digit percentages. Meanwhile, gold gained more than 8% and rounded up the year as a top performer.

The Q4 performance of U.S. stocks marked the first instance that the S&P 500 Index has looked truly vulnerable in a long time. Regarding the dollar, Stoeferle noted that investors are both overly confident in it and skittish to make an extended commitment.

The first point has to do with the well-known debt issue, which has risen dramatically in the U.S. and the rest of the world. Yet Stoeferle finds the domestic debt situation especially troubling, stating that U.S. debt right now exceeds that of Japan and the entire eurozone combined. It’s a massive jump from 2011 levels when the U.S. had similar debt levels to Japan, and Stoeferle is critical of investors who misinterpret the underlying themes in the U.S. economy.

Conversely, Stoeferle pointed out that there has been a relatively tempered amount of interest in the U.S. dollar given geopolitical developments. Although the greenback still holds strong, logic dictates that various issues surrounding the eurozone should bring far more positive attention to the U.S. dollar than they have so far.

Stoeferle also touched upon the subject of an upcoming recession, which most analysts agree is a virtual certainty. However, Stoeferle doesn’t share the view of some economists that the next recession is three or more years away. He notes that the Federal Reserve’s own indicators point to a 28% chance of a recession happening in 2020. Over the last 30 years, such a high figure invariably resulted in a crisis within two months of being made official.

According to Kitco, the case for gold becomes even stronger when Stoeferle reminds investors that the metal has been gaining in nearly every other major currency. The analyst thinks it’s a simple matter of a sentiment shift in the U.S. market that will usher in a lengthy bull market for gold. Stoeferle added that $1,360 is the level that investors should keep an eye on, as the gold market will likely see heavy buying after this resistance is breached.

Trade War Conflict a Bullish Development for Gold

One market analyst says markets are expecting any news that more tariffs will be imposed, boosting gold prices.

trade war conflict good for gold

Ever since trade talks between the U.S. and China got heated, the conflict has frequently been cited as a very bullish development for gold. Given both countries’ presence on the global market, signs that either will radically alter their import and export policies could plunge the world economy into turmoil. An article on Kitco writes that, despite this, most analysts agree that gold hasn’t truly reaped the benefit from higher tensions in the form of haven inflows thus far.

Yet the aftermath of Friday’s no-deal trade talk session between U.S. and China representatives in Washington saw gold climb while equities came under selling pressure. News that the two economic superpowers would try to reach an agreement were met with optimism that has, for the most part, waned. According to Kitco’s senior technical analyst Jim Wyckoff, consensus opinion has moved to expectations that the U.S. and China won’t be able to reach agreeable terms.

This has already resulted in taxation of some $200 billion worth of Chinese goods in a move that drew threats of retaliation from Beijing. On Friday, President Trump seemed content to impose additional tariffs on the remaining $325 billion of Chinese exports still unaffected by new levies.

Wyckoff thinks there is little question in regards to whether the trade standoff is escalating. The analyst noted that neither country has shown any intention of backing down, with leaders on both sides continuing to threaten with sanctions.

As positive as a trade war could be for gold, Kitco reports that Capital Economics markets economist Simona Gambarini said the real focus should stay on stagnating economic conditions in the U.S. Gambarini and her firm predict a plunge in stocks and other risk-on assets throughout 2019, stating that investors will soon lose their appetite for equities due to a global growth pullback. With Treasuries rapidly losing their appeal, Gambarini added that gold and the Japanese yen will emerge as the only viable haven options.

A back-and-forth with China will certainly complicate the domestic economy and possibly expedite the slowdown, which plays into Gambarini’s warnings. FXTM market analyst Han Tan said that gold has plenty of potential to breach $1,290 soon as a continuation of the U.S.-China trade conflict seems all but assured. Tan noted that the markets are cautiously expecting any news that more tariffs will be imposed on China, and that these would translate to an immediate boost to gold prices.

Meanwhile, Kitco reports that Gambarini’s year-end forecast has gold reaching $1,400 on the back of numerous favorable factors.

Gold’s Performance Puts it at Second-Best Asset Since 1999

According to data by JPMorgan, gold had an average annual return of 7.7%.

gold second best asset

In a recent analysis on Seeking Alpha, publisher and money manager Frank Holmes outlined why gold has been the second-best performing asset since 1999. Holmes has previously talked about gold’s outperformance over different time stretches, yet he finds the metal’s long-term reliability of particular importance as global physical demand intensifies.

For the 20-year period ending on December 31, 2018, gold posted an average annual return of 7.7% as per JPMorgan’s data. This places the metal second only to real estate investment trusts (REITs) in terms of performance. In that time, gold has beaten crude oil, real estate and all types of bonds. The latter are generally seen as the primary safe-haven alternative to gold.

Then there’s gold’s performance compared to the S&P 500 Index, which came in with a return of 5.6% during the same period. This questions the view that gold merely acts as a store of wealth whereas stocks provide flashy returns. The performance recap against equities is even more impressive as the stock market is reaching the end of a historic, decade-long bull run. Holmes also points out that the average investor, one who is presumably low in gold weighting, saw a return of a mere 1.9% during the stretch.

According to the Seeking Alpha article, one investor who’s reaping the benefits of investing in gold is Ray Dalio, the billionaire founder of Bridgewater Associates, the world’s largest and most successful hedge fund. Besides being a major personal holder of bullion, the article states Dalio also bases much of his firm’s strategy around the yellow metal. Bridgewater’s SEC filing for Q4 2018 revealed that Dalio has spaced out investors’ money across all corners of the gold market.

Another group of investors intimately familiar with gold’s utility are central banks. According to the article, although global central bankers have been net buyers of bullion since 2010, they have recently upped their purchases in a head-turning manner. China’s gold purchases amid attempts to broker a satisfactory trade deal with the U.S. have been making the headlines in recent weeks, as the Asian nation brought its official gold holdings to 1,885 tons in March. The figure came after four consecutive months of heavy physical buying that put China on track to beat Russia’s own purchases by the end of 2019. For reference, Russia bought a total of 274 tons of bullion last year.

Other central bankers have shown a similar inclination in recent months reports the article, with governments around the world purchasing a combined 51 tons of bullion in February, the largest monthly increase since October 2018. It will no doubt be interesting to see how this translates to gold’s price movement in the coming months. For longer-term oriented investors, however, news that central bank bullion demand has soared to a 50-year high is likely of greater importance.

Fed’s Policy U-Turn a Positive Development for Gold

Similar U-turns in the past have resulted in significant increases in gold prices.

fed u-turn bullish for gold

Not long ago, some were forecasting that the Federal Reserve would raise interest rates up to four times this year. After all, the central bank had been on a hawkish run since 2015, sticking to a schedule that involved a minimum of three hikes per year.

Towards the end of 2018, the forecast was downgraded to an expected two hikes for this year. But after last week, it appears that the Fed might not budge interest rates at all in 2019. Fed officials hinted at this during last week’s meeting, in what was perhaps the biggest display of dovishness since the tightening schedule started. According to an article from Kitco, this is a highly positive development for gold prices.

Despite the metal’s time-proven ability to perform well even amid successive hikes, periods of monetary tightening generally push gold prices down, whether through sentiment or a strengthening of the U.S. dollar. Thus, the shift in Fed policy will remove a major headwind for an asset that has outperformed since the beginning of the year, writes Kitco.

The World Gold Council concurs, stating that similar U-turns in Fed policy in the past have resulted in significant increases in gold prices. In their latest analysis, the WGC took note of gold’s slight price dip over the last week, urging investors not to pay too much attention to it and instead focus on the bigger picture.

As the WGC pointed out, the previous two dovish shifts in Fed policy had a similar effect. According to Kitco, in 2001 the Fed’s tightening wrap-up caused gold prices to sink in the short-term, yet bounce back and post gains over the following 12 months. The same thing happened in 2007: gold went down after the Fed stopped hiking rates, only to end up nearly 20% higher within a year.

John Reade, the WGC’s chief market strategist, said that investors should take special note of this as equities become less and less attractive. In fact, Reade believes that we are witnessing the end of a decade-long recovery in the stock market, reports Kitco. This, along with gold’s historical price movement following changes in Fed policy, leads Reade to think that now is a good time for investors to increase their allocation to gold.

According to Kitco, the Fed’s policy shift and growth forecast downgrade carry deeper implications than the minutes from the meetings suggest. Experts have long warned that various U.S. economic data points to an imminent growth slowdown, something that Fed officials largely ignored as they chose to power through with their hawkish agenda.

Likewise, many have noted that nearly every U.S. hiking cycle in the past culminated in a recession not long after the Fed’s wrap-up. Should a crisis indeed hit the markets following the Fed’s change in policy, Kitco suggests gold’s price gains since the start of the year could mark the beginning of a long-term bullish trend.