Sometimes the markets tee up some pretty easy trades. Investing is subject to trends and fashions, just like the clothing industry. The hot sector today will fall out of the headlines tomorrow. That’s why it’s good to keep part of your wealth in cash or liquid assets, so when those opportunities come by you can capitalize. For people who don’t day trade, don’t deal in options or play the market on margin, the market routinely presents very attractive sectors for long term buys. If you wait until the fundamentals get so out of whack that it makes the financial news, the train has already left the station.
The easy play right now is gold. Just wait, in another six weeks financial news channels will be raving about gold like they just discovered fire. This opportunity is easy to spot because the factors influencing the gold prices have nothing to do with the fundamentals of the metal itself. All of the factors pushing gold around today are external.
Of all the things in the world that can influence gold prices, the relative strength of the dollar compared to other world currencies by far has the biggest influence on the price of gold. That is also true for silver and almost every other commodity traded on open markets and sourced from more than one supplier. That’s because commodity trades are denominated in dollars. Consequently, when the dollar gains strength on world markets, commodity prices move lower to compensate. When the dollar goes on a run against other currencies, that means your dollar buys more gold. The relationship between the dollar and gold is not always exact, because the price of gold is influenced by many factors, but it tends to hold true over a long period of time.
The dollar’s also being pushed higher by the U.S. Federal Reserve going it alone among world banks in its dogged (though still theoretical) resolve to raise interest rates. That determination to hike rates is creating the opportunity to purchase gold at a discount. Our currency policy is still the same disastrous accommodative, near-zero interest it’s been for the last seven years. In that time, despite all the talk, the Fed has raised interest rates exactly one time, for a measly quarter-point increase. They’re talking about, maybe, raising it another quarter-point in December. Considering the volume of cash that flows through the U.S. banking system, a quarter-point is barely a rounding error. The reason such a small potential increase is having such a large impact on the markets is because the rest of the world is doing all they can to dilute the value of their currencies. We’re not really doing all that great in terms of currency policy, just better than everyone else.
Steady Physical Demand
Sales of gold coins at the U.S. Mint continue to run at near record levels. This is also the time of year when gold sales in India surge due to the festival season. Physical demand for gold remains high in China as both China and India vie to be the top consumers of the precious metal.
There just isn’t anywhere you can look in the global economy and make a case that there’s growth. Continued weakness in the Chinese economy, the seemingly endless conflict in Syria, and the uncertainty generated by the Brexit vote and Deutsche Bank means the global economy is not going to ride to the rescue. Thus gold will continue to provide a safe hiding place for edgy investors’ cash.
Continued strong demand both domestically and overseas, combined with a sudden, and one could argue undeserved, surge in the dollar, we’re now looking at one of those rare moments when markets offer up buying opportunities. As long as demand remains high, the rate of growth in gold prices should remain steadily upward. Continued weakness in global markets, the demand for physical gold and the overreaction to the Fed hiking interest rates are all positive for gold prices going forward.