Hedge Funds, Central Banks Seeking Protection with Gold

With gold prices dipping in the past few months, here’s why some of the most prominent of these institutions took advantage of the buying opportunity.

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In an interview with Kitco News, Phil Streible, senior market strategist of RJO Futures, shared his views on why some of the largest buyers of gold seem to be stockpiling the yellow metal despite a lack of overt volatility. Even though the latest batch of economic data that revolves around lower interest rates has held up, actions from big investors and central banks alike suggest that both could be preparing for a coming crisis.

This notion is supported by gold’s recent price pullback, which may have offered big buyers an opportunity to stock up after a major price spike this summer. As Streible noted, gold has a little more room to trend lower with major support at $1,425, meaning that these big investors could continue to take advantage of lower prices before gold bounces back to its major resistance at $1,550.

Speaking about the buyers themselves, Streible noted that Ray Dalio has been perhaps the most prominent figure in the gold market in recent weeks, having added roughly $1 billion of put options on the S&P Index. Dalio, the billionaire investor who manages Bridgewater Associates, the world’s best-performing fund, has long been an advocate of buying and holding gold, and has based much of the fund’s strategy around the yellow metal. A move like this could potentially indicate that Dalio and his team are seeing something that other investors aren’t and are making the most of an opportunity before a coming storm.

Another source of heavy gold demand has been central banks around the world, with various nations who were previously absent from the gold market raising eyebrows with their sudden multi-ton purchases of gold bullion. Last year set an all-time high record of gold purchases from the official sector, with the total year-end figure clocking in at 651 tons while most forecasters had previously expected a number closer to 300 tons. This year, many are expecting central banks to outdo themselves again, with early predictions placing the total gold purchases by central banks in 2019 above 750 or even 800 tons.

Streible thinks that there is little question that central banks are seeking protection and safety through these gold purchases. The analyst named the various trade wars currently taking place as perhaps the key reason why central banks are rebalancing their portfolios in favor of gold.

Streible also noted that, despite the U.S. dollar’s inverse correlation of gold, the greenback has pulled back alongside the yellow metal. Streible sees this as a result of lower interest rates that are pushing investors to take their money out of banks and move it elsewhere, adding that this is comparable to other fiat sell-offs during times of perceived currency weakness. Although the Federal Reserve appears to be holding a neutral view on the U.S. economy, Streible said that investors should look out for potentially disappointing trade data, scheduled for release next week.

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Goldman Sachs: Gold Prices to Hit $1,600 in Six Months

Following the Fed’s third interest rate cut in two quarters, Goldman Sachs is increasingly bullish on gold. Here’s why they say prices can hit $1,600 by April.

The Federal Reserve met most market expectations this Wednesday by cutting interest rates for the third time this year after rigidly sticking to a tightening cycle that started in 2015. In a report published ahead of the Fed’s decision, Goldman Sachs predicted that the Fed’s latest cut would be accompanied by a more hawkish tone than those of previous months in order to ease concerns over the domestic economic trajectory.

The cuts started mid-summer, following an abrupt policy shift meant to offset the effects of the U.S.-China trade war. With a third cut in the books within two quarters, Goldman’s analysts believe that the Fed is growing wary of investors pulling back over a palpable domestic and global growth slowdown.

The three cuts have already given gold plenty of support, as the metal has enjoyed its best run since 2013 and remains firmly above the $1,500 resistance level. Yet Goldman’s analysts believe that there are plenty of other factors supporting the gold market that will push gold to $1,600 over the next six months.

These include conspicuous de-dollarization by central banks around the world, which bought a record 651 tons of bullion in 2018. Forecasters expect the official sector to exceed this figure handily this year, with most predicting a combined 750 to 800 tons of bullion bought by the end of 2019.

Goldman also lists the many risks that have kept investors on their toes this year, including the aforementioned trade conflict, tensions with the Middle East, the likelihood of a no-deal Brexit that could disrupt the eurozone and political turmoil in the U.S. To top things off, the global growth contraction has resulted in diminished factory production as well as business investment.

Goldman’s team also took note of an increased affinity towards defensive portfolio rotations, noting that the economic climate has created a precautionary savings glut with an increased demand for cash that has boosted the price of gold and bonds, despite the latter’s dismal showings. This risk-averse investment and uncertainty regarding policies is unlikely to be resolved anytime soon, said Goldman.

Standard Chartered’s precious metals analyst Suki Cooper voiced similar thoughts in a report released last week, stating that three rate cuts would be highly supportive of gold, especially given the number of risks on the horizon. Cooper also noted that the Fed might move on to cut rates for a fourth time in December. Adding on to Goldman’s prediction that gold will hit $1,600 by Q2 2020, Cooper said that the metal is so well positioned that any pullback in prices would be restrained to the $1,450 level.

UBS Predicts Big Gains for Gold in the Next Year

Looking forward to 2020, the Swiss bank details a number of factors that are joining to push the price of the yellow metal higher. Find out what they are here.

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After already predicting in August that the price of gold will reach $1,680 by 2020, Swiss bank UBS has raised its forecast for the metal for the second time this year. Now, the bank known for its conservative predictions sees the metal soaring to $1,730 by the end of next year, a roughly 15% increase from current valuations.

In their report, the bank’s strategists outlined various factors that should send the metal’s prices flying over the coming year. One will be a persistent environment of negative real rates that will create a dearth of haven options during a time when investors are rushing to safety. Central banks around the world have sliced their rates as of late, with many top economies now issuing bonds with a negative yield, forcing bond holders to pay the government. Despite this, the appetite for bonds has hardly subsided, showing that investors are turning towards risk-averse assets after a lengthy period of profit-chasing.

The global growth slowdown will also play a prominent role in gold’s continued leaps, as disappointing reports from top manufacturers continue to pour in. The slowdown ties directly into the U.S.-China trade war, which has already taken its toll on both economies as well as the global market. Other uncertainties include the rising likelihood of a U.S. recession, the risk of which currently sits at its highest point since 2008, according to a Federal Reserve gauge.

Despite some losses in September, UBS noted that the metal’s price hasn’t been jumping in both directions but rather appears to be on a steady climb. Although gold has fallen off since its recent high of $1,553, it has continually bounced off from the important $1,500 level, suggesting a potential long-term upwards trajectory.

The bank took note of current buyers, stating that individual investors have yet to truly make waves in the gold market. Instead, the gains so far have been powered in good part by large funds, which have steadily increased their gold allocation in recent months. Besides institutions, the jump to six-year highs was also driven by heightened interest by central banks around the world. In 2018, the official sector ramped up its purchases to more than 650 tons by year’s end, and early forecasts say that the number could be even higher this year. While many nations have made multi-ton acquisitions over the past months, China’s case has been especially prominent, with the People’s Bank of China now rivaling Russia in terms of bullion purchases.

According to the bank, the relative absence of individual investors thus far is a bullish development, as their entry into the market will play a vital role in what UBS sees as an exciting year for gold.

Why Gold Is About to Make this “Monster Move”

As gold continues its recent ascent, why might this recent move be completely different from the yellow metal’s last few bull markets? Find out here.

In a recent analysis, Forbes contributor Rob Isbitts examined why gold’s recent price gains might be nothing like the other spikes that we’ve witnessed over the past few decades. Instead, Isbitts thinks the global markets are shifting to prop the yellow metal up in spectacular fashion and potentially over a prolonged period of time.

Isbitts recognizes that there is an ongoing flight to safety among investors due to growing uncertainty surrounding global growth, the stock market and geopolitical tensions. This is evidenced by gold and bonds each rising 8% in August, as the two asset classes are generally viewed as the go-to in times of turmoil. Yet while the gold market is flourishing and is held up by numerous sound drivers, the global bond market is in its most dismal state in recent memory.

As Isbitts points out, bonds around the world are sinking into zero or negative-yielding territory. A number of bonds in Europe and Asia have already dropped below zero, forcing their holders to pay interest to the government instead of vice-versa. Of course, Isbitts notes that not everyone buys bonds for their safe-haven appeal: some are forced to purchase them for pension funds, while others buy them for short-term trading. None of these groups of investors, however, are likely to tolerate negative-yielding bonds much longer.

This brings Isbitts to the 10-year Treasury, which has long been treated as a marquee bond by global investors. Recently, the Treasury yield curve fulfilled ominous warnings as it reached the point of inversion, something that is almost universally treated as a sign that a U.S. recession is on the way.

However, there is more to Treasuries’ tepid action than just the threat of a recession. As Isbitts notes, while bonds overall rose 8% in August, the 10-year Treasury’s yield fell to a concerning 1.50%. Over the past 30 years, the gold market has seen two instances of what Isbitts refers to as “monster moves”, and both came during times of unprecedented economic and geopolitical instability. Isbitts believes that we are approaching a third instance of such turmoil, but with one extremely important difference. During each of the two instances where gold prices experienced monumental spikes, 10-year Treasury yields sat between 4% and 5%.

This time, however, they are nearing record lows. Isbitts is among the many believers who think that the 10-year Treasury will eventually follow the path of its European and Asian counterparts and sink into negative territory, something that would have been inconceivable not too long ago. The dip will coincide with a domestic, and possibly global, economic crisis, where investors of all kinds will once again flock to pour their wealth into safety. And as they contrast the landscape of negative-yielding global bonds against the consistently-gaining gold market, there won’t be much of a choice in terms of where to move their holdings.

Gold Rises Above $1,500 on Recession Fears

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

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.

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

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

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.

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.

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.

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%.

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.