Gold hit a rough patch the first week in October, posting its lowest seven-day performance in months. This price volatility is almost certainly related to the Fed, as markets start pricing in what looks like an all-but-certain December rate hike. The rate hike speculation boosted the dollar on global markets, which put downward price pressure on commodities. But instead of being fearful, those who hold precious metals as a tangible asset should see last week as a gift, particularly in view of new recession fears.
But look past that bumpy last week and gold is up nearly eighteen percent on the year. When the discussion comes around to attractively priced assets, gold is still near the top of nearly everyone’s list. Last week’s price action had most analysts in agreement that gold was oversold and the cash flow reversed quickly.
Prices Up Early This Week
Already we’re seeing the bargain hunters step in early Monday morning with prices up $4.50 an ounce to just over $1,256. Silver is chasing gold higher by $0.02 an ounce to $17.50, up over eight percent for the year. Anyone looking for attractively priced tangible assets should be looking at gold this week.
Former Goldman fund manager Raoul Paul suggests that given the global systemic risks of negative interest rates and possibility of a global recession, the price of gold should be much higher. He suggests that uncertainty about the Brexit vote and the timing of a U.S. interest rate hike have kept capital flows positive for the dollar. But Paul believes that once markets stabilize and Britain finally leaves the EU, normality will return to the dollar.
Paul also believes, as we have suggested many times, that small investors can use gold to hedge against negative interest rates. With some big banks in Japan and other countries experimenting with negative interest rates, leaving savers and investors contemplating ways to park tractor trailers full of cash in secure parking lots, it should surprise no one that gold would take center stage as a way to hedge against currency valuations. Or to be more precise, devaluations.
Even big fish commodity traders, including Dennis Gartman, have been surprised at how well gold prices have held up in the face of a strong dollar. He calls the price dynamic “atypical” and suggests that holding gold is a smarter play than either the dollar or the euro right now. He also considers gold a less risky play than oil, which is barely clinging to $50 a barrel.
Yellen Admits Recovery Falling Short
Today Federal Reserve Chairman Janet Yellen provided a high-level overview of where the U.S. economy might be stumbling. Without addressing interest rates directly, Yellen did suggest there were several weaknesses in the recovery, and outlined aggressive steps that the Fed could take to address those vulnerabilities.
If the Federal Reserve is already outlining plans for how to manage a recession, that should ring alarm bells for smaller investors. If you’ve been putting off rebalancing, then right now you have a unique opportunity to play catch-up at attractive prices.