As non-traditional monetary policies in advanced economies are likely to eclipse, investors will increasingly turn to gold to hedge their portfolios. Around mid-April, when the price of gold was still about $1,290, I made a contrarian projection that gold had a bright, though bumpy future. Since then, gold price has climbed to $1,365 – which translates to 6% in just one quarter.
It wasn’t so long ago that some of the more famous investor gurus were shrugging off gold as nothing more than shiny trinkets with no investment value. They were wrong. This safe haven is back, the recovery is clear, and there have been some very big changes of heart.
The biggest gold producers in the world have seen their share prices double this year. Not only are gold prices soaring, but producers are cutting costs and slimming down debt as they pave the way for gold to return to the top of the favored commodities list.
Many investors still think about gold as if it were money. Economists identify three functions of money: store of value, means of exchange, and a unit of account. It can be a store of value, but the price fluctuates compared with other forms of money, or other commodities, like oil or silver.
Some argue that it is a store of value because of the limited supply, but that argument applies to many other goods, including commodities and real estate (which Mark Twain said you have to invest in because they have stopped making it).
Not so long ago, gold suffered the most challenging losses since 1999. According to conventional wisdom, US rate hikes will contribute to its further decline. If that’s the case, why did gold prices soar during the last quarter?
At the turn of 2015, gold was driven by the broad commodity sell-off, especially the drastic plunge of oil prices that was fueled by the stronger dollar, along with concerns over China’s growth deceleration. Yet, the reality is that gold has low correlations with commodities and other asset classes.
During a period in which the zero bound no longer is the floor of interest rates, and many central banks continue to ease policy, we have been watching gold a bit closer.
In early January, we noted that the technical pattern warned of breakout. Our first objective was $1110-$1135.
In early February, we updated our view with gold trading near $1150. The charts still looked constructive; we suggested a new target near $1200.
Keynes and others may have referred to gold as a barbarous relic, but many investors continue to track it. In early January, we warned that gold appeared to be breaking out of a short-term bottoming pattern.
It had taken out a three-month downtrend line, which we suggested was part of a triangle pattern. Gold also traced out a double bottom pattern. The triangle pattern pointed to a move toward $1110 and the double bottom projected to around $1135. The yellow metal poked through $1157 today and remains near it highs in late turnover.
With equity markets tumbling, escalating tensions between a Saudi-led Sunni bloc against Iran, ongoing hostilities in Syria, North Korea testing what it claims to be a hydrogen bomb, the once precious yellow metal is looking perky.
Gold recorded a six-year low in early December (on the same day the euro fell to $1.0525 when the ECB met). That low (~$1046.45) retested a fortnight later (~$1047.75). Between the two lows, gold reached almost $1089. If this is a double bottom, the minimum measuring objective is near $1132.
The price of gold rallied by about 5.25% off the five-year low set in late-July near $1172 an ounce to the high set earlier today. More than half this rally took place this week, seemingly in response to the heightened uncertainty as China changed its currency regime.
Not so long ago, gold rose to new highs. Recently, it has suffered the most challenging losses since 1999. The Fed’s rate hikes do not bode well for the gold in the near term, but what about in the medium-term?
Gold prices have tumbled to a five-year low. As a tradeable commodity, the price of gold is largely linked to supply and demand. While supply remains fairly fixed, demand is shaped by the state of the global economy and investor perceptions of gold’s value as an asset – this is in turn shaped by the strength of the US dollar.
