There is a ton of investment capital pouring into the gold market. With the markets extremely turbulent right now, you might be wondering, why are they rushing to buy gold?
With the dramatic downturn in the markets over the last two months, and to a greater extent in the last six months, even the price of gold has taken a hit. Many investors are wondering, “Why hasn’t gold hit $2,000 an ounce yet?”
Given all the macro conditions, gold seems like the perfect asset to own right now, but it has failed to reach the $2,000 level on two separate occasions, so what gives?
Well, this time around the problem is the Federal Reserve. The Fed has been aggressively raising interest rates at a pace not seen in forty years, all to combat the brutal inflation. The idea that there will be even more rate hikes is making the dollar more attractive at the moment, compared to gold, because gold does not pay a yield.
After reading this Birch Gold Group review, it is obvious that the strength of the dollar has caused weakness in the price of gold. When this happens, and investors get concerned, it’s important to zoom out and take a broad look at what is happening.
Nothing has fundamentally changed with the thesis of owning gold. The thesis of gold continues to strengthen, and the price has weakened, so this is a great opportunity to get into the gold market, or as many mutual funds are doing, to buy more.
Nothing goes up or down in a straight line and although the gold market will go much higher, it will be a rocky road up.
We know that in today’s hyper-connected world, where information travels instantly, knee-jerk reactions in the financial markets have become the norm. Investors get terrified of the quick moves down, and then forget about them a week later when for no real reason the market rockets up higher.
Because markets are forward-looking mechanisms, it has already priced in at least five, to maybe seven of the rate hikes announced by the Fed.
What is interesting to note, is that never before has the Fed started tightening going into two straight quarters of negative GDP growth. This is reckless for sure, but they want to combat inflation. But this inflation is caused by shortages, not the money printing, so they will not be able to stop inflation by raising interest rates.
“Ok great”, you say, but what does that mean for gold? Well, because the Fed won’t be able to stop inflation, and they are crushing the economy by raising rates, then they will have to abandon their current course of action and… start the printing press again.
And that is bullish for gold.
Another curious hypothesis for the current downtrend in the price of gold was offered by Fidelity’s own Graham Smith. Smith pondered that market is unsure of what Russia will do with its gold stockpile, which is rumored to be around $140 billion.
Since Russia has been frozen out of many financial markets and kicked off the SWIFT payments system, they may decide to use some of their gold to make some of their payments. If this happens, then a significant supply of gold will flood the market, which will temporarily lower the price per ounce of the yellow metal.
Gold has been one of the few stable assets recently. With China’s insane lockdown for a zero Covid policy, the Ukraine-Russia war, brutal inflation, and supply chain shortages, gold has done relatively well.
Traders are beginning to pay attention to the massive capital flows that are going to gold. This secular bull market began in 2017 and as history shows, gold bull markets tend to last for 10 years. So this bull market is only about halfway going. Now that the stock market is rolling over, investors in mutual funds are running to the safety of gold.
What you are seeing with the gold price action is the tell-tale signs of a bull market: higher lows, followed by higher highs.
Money managers are under pressure with the recent market sell-off and they have to rebalance their portfolios. For exposure to the gold, they are doing this in two ways, by purchasing shares of GLD which is the American SPDR Gold Shares mutual fund, and IAU iShares Gold Trust gold exchange-traded funds (ETF).
Not only are paper gold assets surging, but demand to hold physical gold is surging even more. Per a report on Fortune.com, demand for physical gold rose 34% during the first quarter of 2022 as inflation wreaked havoc on the American consumer.
The first quarter demand was the highest since 2018, and all signs show that this trend is just getting started.
And you can not forget about central banks. As much as they like to bash gold and say that it is not money, their actions are completely different than their words. They added to their holdings in gold as well during the first quarter of 2022, and are no doubt using this correction in all asset classes as an opportunity to bolster their gold stockpiles while the price is depressed.
As much as folks don’t like the central banks, it would be wise to emulate their moves and purchase gold for your portfolios while it is trading at a discount.
In general, the price action in gold will remain volatile. Investors have never been in a position like today. Investors have never seen the Fed raise rates after two straight quarters of a negative GDP print.
With high energy prices, rising rates, and slowing demand, growth is falling off a cliff, basically guaranteeing a recession in the next 12 months. While recessions are bad for the economy, they tend to be very good for the price of gold.
Even Wall Street titans like Ray Dalio are extolling the virtues of gold. The world is in disarray. There are disruptions and shortages in just about everything. The energy disruptions are making their way into food production and will food shortages come with revolutions and chaos.
Of course, all this uncertainty is bad for just about everything except precious metals. If you asked gold how many recessions, revolutions, and panics it has experienced in its 5,000-year history, it would like to tell you that it has seen so many that it has lost count.
Gold is doing its job like always. Make sure you have some in your portfolio. For a more in-depth discussion of the wild time we live in, where not only gold, but also the dollar, and the stock market, will all rise in tandem, you should check out this very interesting interview with Brent Johnson of Santiago Capital.