As 2015 draws to a close, how exciting to see both gold and silver hovering near the lowest prices we’ve seen since 2010!
Whether you acquire precious metals for diversification or some other purpose, it is an excellent time to be keeping a close eye on the metals markets.
Last week was short for the holidays, but we still saw a slight run-up: gold rose 1% to $1,077,80/oz. while silver traded up nearly 2% to $14.40/oz. However, thus far in December both gold and silver prices are basically flat and up less than 1%.
If you want to know what’s going on, it helps to know what has been happening at the Federal Reserve.
DON’T BELIEVE THE HYPE: RISING RATES AND GOLD
Over the course of December, analysts and investors were laser-focused on the Federal Reserve’s newly implemented interest rate policy. Specifically, the Fed indicated that it plans to make four quarter-point rate hikes in 2016 to bring the Fed Funds Rate to 1.25%-1.5%.
As rising rates can be evidence of a strengthening economy, some analysts suggest assets like gold are less desirable in times like this, since precious metals don’t generate interest.
Don’t believe a word of it!
Examine the evidence: it is far more likely that the Federal Reserve’s rate-hike policy means gains ahead for gold. Adam Hamilton recently analyzed historical gold price data in past rising-rate periods and found that gold does very well; in fact, stocks can underperform gold dramatically during rate hike cycles.
Why? A rising Fed Funds Rate can make it more expensive for companies to borrow money in order to make investments. Analysts place less value on future expected corporate earnings when interest rates are higher. This means less corporate investment and more downward pressure on stock valuations, which are currently at historic highs.
This is no joke: Henry Blodget of Business Insider suggests that stocks are more expensive today than they have been at almost any point in history.
PRO INVESTORS WEIGH IN ON GOLD
Given this situation, it is no wonder that celebrated money managers are advocating that investors diversify into precious metals right now.
Marc Faber recently warned that investors should accumulate gold in preparation for a recession. He considers recent Fed monetary policy to be calamitous, as it has increased global debt while generating minimal growth.
Billionaire investor Paul Singer of Elliott Group recently called the gold market “under-owned.” To his thinking, gold is a fundamental part of any portfolio and investors should allocate 5%-10% of their assets to precious metals.
OVERSEAS DEMAND: CHINA GOING FOR GOLD
Overseas demand for gold is extremely robust, particularly in China and India.
Koos Jansen, who tracks the international gold trade, points to record exports from Switzerland and London into China in recent months as Chinese citizens look to take advantage of low market prices. In fact, the Chinese government has been pushing citizens to purchase gold ever since the 2008 financial crisis.
Chinese demand is so strong now that it actually eclipsed mighty India’s gold buying back in 2011.
All the same, Indian demand remains solid too. Gold is still a central celebratory item that is shown off and given as a gift in India, especially to newlyweds. Indians are also wary of their currency’s somewhat-uncertain value and many prefer to hold physical gold to protect their savings.
The Indian Government has backed a program allowing Indian citizens to turn in their physical gold in exchange for an interest-bearing gold-backed certificate. However, only a handful of Indian citizens have responded, with most people evidently preferring not to give up any of their physical gold. This speaks to Indians’ strong desire to own gold and to the appealing features of physical gold in particular.
LOOKING AHEAD
Looking ahead to January, investors will be free of holiday distractions and able to see the coming year with fresh eyes. There is plenty to look forward to, but also plenty to be concerned about:
political instability and infighting
global economic insecurity
stock market volatility
downward pressure on the dollar and other major currencies
I’m not here to scare you, but just to ask you to do what any sensible person does when they are faced with uncertainty… ask really good questions!
Give our experts a call today and ask what this coming year means for you and your portfolio.
I think you might find physical gold and silver to be the perfect tool for diversification and peace of mind in the face of ever-challenging markets.
