As the clock runs out on February, gold is set to turn in its best monthly performance in nearly three years, up nearly ten percent. For months before the January meltdown we were cautioning our readers to lock in gains from high flying stocks and use some of that cash to buy high quality gold and silver bullion. For those of you who listened—time to give yourself a pat on the back. Well done. Year-to-date, gold’s beat out high-yield bonds, Treasuries and virtually every stock index on the planet.
Those of you who sold off some stocks to buy gold back in 2015 looked crazy at the time, just like every winning investment looks crazy at (what turns out to be) the best time to plunk your money down. Not only did you avoid massive stock losses, but you shifted your money into a winning sector. Now comes the really good news: the gold rally may be just getting started. Of course, all sunny news comes with the usual caveat that volatility in markets is the new normal, but there are several factors coming together that are very supportive of gold prices in the days ahead.
Gold Bears Rethinking Positions
For years gold analysts have been the bad news bears, but that’s changing lately, with analysts abandoning lower-end estimates in favor of year-end price of gold in the range of $1,250 to $1,500. Interestingly, gold has been out of favor so long on Wall Street that the rally is taking time to register in many parts of the investing world. Once they figure out that gold is the smart play, they’ll be back and in bigger numbers.
Crazy As it Sounds – There’s Too Much Cash
Cash is like water; it has to go somewhere. A selloff in the stock market means there are a lot of big investors out there awash in cash. Banks don’t want it, the government definitely doesn’t want it and investors don’t have a lot of options for cash these days, other than parking it in a money market fund and watching it lose value. By moving a portion of that cash to high quality physical gold and silver, investors can hedge the buying power of their currency with a liquid hard asset.
Big Demand in China
Gold jumped on the Shanghai Exchange as Chinese investors are in basically the same predicament as their U.S. counterparts. They’re gun-shy of the Chinese stock market after heavy, sustained losses and are fleeing to gold as an alternative and hedge against future volatility and their government’s continued devaluation of their cash.
The Dollar and the Fed
Another sustaining factor in the price of gold will be the Fed. While trying valiantly to get interest rates back to something resembling normal, our central bank finds itself increasingly isolated on the world financial stage. The dollar’s been stubbornly overpriced for years and the Fed hasn’t been able to stop the upward drift, largely due to the fact that most other nations are printing money and dumping cash into their respective economies. This puts U.S. businesses at a competitive disadvantage in world markets and raises pressure on the Fed to do something about it. If they react by announcing a halt in future rate increases, it would be like lighting a fuse under gold prices.
Even Gold ETFs Are Higher
Our readers know we don’t advocate paper gold products but that doesn’t mean they don’t have an impact on physical gold. Gold Exchange Traded Funds do buy a lot of physical gold. Okay, technically they lease it, but that’s another column. The important thing to know is that paper gold products can account for as much as twenty percent of the gold purchases going on in the market. That’s a fairly massive shift from just a few short months ago and paper gold products had been cutting the amount of physical gold they kept for redemptions, in effect shorting gold. Now they have to tighten up their inventory and buy back those reserves. That should be another upward impulse on gold prices for some time.
For those who moved into gold back in 2015, 2016 has been an awesome year so far. The great news is gold still has plenty of room to climb higher.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.