2016 kicked off to a rocky start last week with sharp sell-offs across global equity markets, a 6% drop for the S&P 500 and falling oil prices as well.
This was, in fact, the worst starting week for the S&P 500 in its entire history.
As you might expect, gold and silver remained resilient as concerned investors looked to safe haven assets amid the storm. Gold closed last week at $1,099/oz, a gain of roughly 3.5%, while silver closed at $13.95/oz. for a gain of nearly 1%.
If you’ve been following precious metals for a while, this remarkable counter-balancing behavior will come as no surprise. Over time the argument is strong for holding gold as an overall wealth protection and diversification tool alongside traditional paper assets like stocks and bonds.
According to fund manager Axel Merk, “gold has been a profitable diversifier in each bear market since 1971, except for the one induced by Paul Volcker in 1980. We don’t think we are about to experience massively positive real interest rates as Volcker imposed at the time.”
We would agree. This chart says it all:
CAUTION: MORE UNEVEN ROAD AHEAD
Analysts have become more negative on the outlook for the US economy: Citigroup is estimating a 65% chance that the U.S. economy will enter a recession this year. Greg Greer, head of Global Debt Capital Markets at Scotiabank, thinks low oil prices will continue to depress economic growth and market performance throughout 2016.
Global geopolitical tensions are simmering too. North Korea claims to be experimenting with a hydrogen bomb. BBH analyst Marc Chandler believes that escalating problems between Saudi Arabia and Iran, amid other rising Middle-Eastern tensions, could add unpleasant volatility to the global markets.
Not surprisingly, gold analyst Peter Schiff reiterated his call for $5,000/oz. gold in a Kitco interview.
CENTRAL BANKS DEMAND GOLD
It isn’t just analysts who are giving gold a fresh look.
With gold near a multi-year low, central banks continue to acquire gold at an impressive rate. The People’s Bank of China added roughly half a million ounces to its holdings in December, bringing its total hoard to over 56 million ounces of gold!
Shu Jiang, an analyst at Shandong Gold Group, told Reuters that China’s central bank will continue to accumulate gold as it looks to diversify its foreign exchange reserves.
