A powerful combination of weak growth in the global economy and low interest rates in the global banking system pushed gold prices to a thirteen month high this week. The precious metal jumped nearly five percent in one day as gold bulls took over and kicked the bears to the curb. The price move officially marks the start of the bull market for gold, with prices up twenty percent since last December.
This day has been a long time coming for gold traders and there are signs the bull market in gold still has a long way to run. In many ways gold prices were being kept artificially low and this breakout was inevitable. Many analysts are talking about the pervasive uncertainty in global markets driving gold demand, but the broader trend may be more about trust of this hard asset than fear. Investors may have finally awoken to the fact that mega-banks and central banks, frequently staffed by people on identical career tracks, can’t be trusted with the financial security of their depositors.
ETF Race to Catch Up with Demand
Gold ETFs got caught by the turnaround in prices, as many had previously reduced the amount of physical gold kept in reserve to cover physical redemptions (another good reason to pass up “paper” gold, since paper may be all you ever see). The gold paper traders were, in effect, shorting physical gold. The price reversal caught them by surprise and now the gold ETFs are scrambling to raise physical inventory. Inflows of physical gold to ETFs so far this year have now surpassed outflows for all of 2015.
Central Banks Load Up
Central banks have started adding to their gold reserves, another big buyer that adds lift to gold prices. China’s central bank added the most, but their official figures are not always reliable. What we do know for certain is that central bank gold buying was up twenty-five percent in Q4 of 2015. Central banks, including those in China and Russia, are likely to continue accumulating gold all through 2016.
Many analysts are pointing to justifiable investor fear as the reason gold is making a rally. While fear is certainly a factor, the reality check of the recent stock market meltdown was likely a bigger factor than fears of future volatility. Investors got a reminder in January and February that markets can hammer those who neglect a diversified investment portfolio, one that includes a fixed portion of your wealth in liquid hard assets. When an asset class like stocks is really flying, it’s easy to neglect rebalancing. But over time this lack of rebalancing resulted in portfolios that are too skewed toward stocks; a setup to get burned in the great correction that hammered stock returns in January and February.
Negative Interest Rates
The idea of negative interest rates must have started out as kind of running joke among central banks. It was funny until a number of central banks, including the European Central Bank and the Bank of Japan, decided to actually try it. Negative interest rates came as a shock to investors and reminded them, in glaring terms, that central banks are run by crazy people. It was also a reminder that, no matter how out-there an idea might seem, let it sit around on the table long enough and someone will suggest giving it a try. After all, it’s only your money.
A Smart Distrust of Big Banks
It’s hard to ignore the factors lined up against the individual investor. These include negative interest rates worldwide, our Federal Reserve raising interest rates at a time other central banks are dumping cash into their economies, and the ongoing race to the bottom in global currency wars. Put together, they’re unmistakable reminders to investors that central banks and big private banks are run by basically the same group of people rotating from jobs in the private sector to government agencies charged with “regulating” banks—and back again. Given the number of corruption scandals sweeping big banks, from outright fraud during the housing market meltdown, to price-fixing in the commodities markets, investors can no longer afford to ignore the evidence our financial institutions are run by con men and madmen.
You can’t trust cash, you definitely can’t trust banks, but you can trust high quality gold to preserve your wealth and protect your future.