The Gold Glimmer Behind Market StormsWill Granderson
One of the inescapable realities of investing is that if you wait until a trend becomes news everyone knows, you’ve already missed the train. So it’s important to see the crest before it becomes a wave. With that said, while it’s been one of the worst starts on record for the stock market and a parade of woeful economic news is already clouding 2016, gold buyers are celebrating solid gains.
Gold’s been on a hot streak despite what should be continued headwinds. The dollar remains king among global currencies and the Federal Reserve hasn’t, at least publicly, retreated from its previous stance on continuing to raise interest rates. All the same gold is pushing past those obstacles to gain 5.4% just since the beginning of 2016. The better news for gold and silver investors is that the forces that have kept gold prices artificially low are likely to start weakening in 2016.
The Dollar Can’t Stay High Indefinitely
What started the downward trend in commodities was the rise of the dollar among global currencies. The Japanese deliberately devalued the yen in advance of the TPP trade deal and China devalued the yuan when manufacturing growth slowed. Right about the same time the European Central Bank engaged in an additional round of economic stimulus, pumping more euros into the market. The combination of those factors was sort of a perfect currency storm for the dollar and pushed valuations to insanely high levels on world markets. The fact is the U.S. just can’t be the good guy on currency much longer. The strong dollar is killing sales of U.S. goods and services overseas. At some point, very soon, the Fed will be forced to normalize the dollar in relation to other currencies.
Oil Prices Have to Give
What started the slide in oil prices was the same strong dollar that put pressure on every other commodity. But instead of cutting back on production, oil-producing nations kept production at the same levels and prices cratered, and a bad situation is about to get worse now that Iran has access to world markets. Oil prices have put many emerging market countries, like Russia, Brazil and Venezuela in a real bind, leading to an economic slowdown and lack of liquidity in global markets. Thirty-dollar-a-barrel oil simply isn’t sustainable and prices will have to recover at some point.
Low oil prices are feeding a vicious circle of conflict and economic woe around the world. The only certain growth market in 2016 is instability. When fearful winds blow across the globe, investors respond by buying gold. While that instability is bad for stocks, investors who shelter part of their wealth in gold will see volatility in equities balanced out by gains in precious metals.
Volatility a Virtual Guarantee
Instability and volatility are inseparable in our new connected global economy and no one likes volatility when it comes to investing. The sensation of watching markets fall ten, twenty or even forty percent in the span of a few days has many investors rethinking their mix. In the connected global economy, such catastrophic events are not necessarily related to anything bad happening in your own economy, and hence less predictable. Disaster can, quite literally, strike from a clear blue sky. For those of us over forty and nearing retirement, this means it’s crucial we taking an increasingly defensive asset allocation as we get closer to retirement.
With volatile “death drops” in the stock market coming at increasingly short intervals, the old days of “set it and forget it” investing are over. Rebalancing at least once a year and adjusting your investments both for age and a defensive stance against world events are more important today than ever before.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.