A rare buying opportunity for investors

Historically and traditionally, gold has always been seen as a safe place to invest in uncertain times – Recently, it hit a more than six-year high of $1,557 in September and with gains of about 17% so far is set for its biggest yearly gain since 2010.

The valuable metal has become the go-to asset for both investors and central banks given the recent rise in uncertainties fuelled by trade and political disputes around the world.

As we all know, precious metals have been influenced by many factors worldwide. Along with the ongoing trade war, there are recession fears, political uncertainties, weakening global economies and many other reasons that play an important role for the yellow metal.

These concerns are more than justified. On the economic front, bad news continues to pile up. The trade war, as well as the numerous systemic vulnerabilities in all major economies, appears to be boiling over.

Trade war- Both U.S. and China have imposed a series of tit-for-tat tariffs over the past 15 months, stirring global recessionary fears and driving gold prices more than 17% higher this year, but the recent development has put a lid on gains.

China’s ongoing trade spat with the United States is likely one of the major reasons for China’s gold purchase ramp up this year. Unlike more volatile assets such as equity and currency, gold is much easier to trade and it does offer relatively high returns. China has replaced India’s positions of being the highest consumer of gold in the world. Rising demand results in rising prices.

Rate Cut– Rate cuts by major central banks, a deteriorating global economic outlook and elevated geopolitical tensions are the key tailwinds for gold prices. Major central banks, Federal Reserve, ECB are in the lead to cut interest rates.

The U.S. Federal Reserve has meanwhile cut interest rates twice this year to stimulate growth, and other major central banks have followed suit.

Lower rates reduce the opportunity cost of holding non-yielding bullion, making it more attractive to investors.

Central banks have also steadily increased their gold reserves and private cash has flooded into gold-backed exchange traded funds (ETFs), boosting physical demand.

Weak Data- In September, U.S. manufacturing activity tumbled to a more than 10-year low, according to the Institute for Supply Management, while growth in the services sector also sharply declined to the lowest point in 3 years. In August, German industrial orders fell by 0.6%, much lower than the expected 0.3% drop, while the economy shrank by 0.1% in the second quarter. This weakness is widely expected to continue and another contraction would put the country officially in recession territory thus creating an extremely critical environment which results in higher gold prices.

Easing policies– in addition to the mounting recession fears, we’ve also seen central bankers cave to market and political pressure and commit to a decisive return to easing polices, which sets the stage for a very bullish period ahead for gold

Even if we see the bear market, the main negative factors (for gold) are the speculative overhang in the futures market and the lacklustre demand from physical buyers from major gold demanding countries.

After a remarkable run over the past few months, gold appears to have entered a period of consolidation. Many speculators and short-term focused investors have sold their positions fearing a correction, while mainstream market commentators fuel these fears, with analyses that proclaim “the end of the road” for gold and silver.

Of course, nothing could be further from the truth. All the very serious concerns and the fundamental reasons that caused the metals to rise so aggressively in recent months are not only still intact, but they have grown, and spread, and find even more solid footing every time new data comes out of the Euro zone and the US.

All eyes will now be on the Fed meeting, but what investors are really looking forward to is some clarity on whether the central bank will continue to remain dovish for the rest of this year. 

Thus, for the cautious investor, who is known with monetary history, with economic cycles and with the merits of a low time preference, moments like this present a rare buying opportunity? And in this case specifically, current price levels might be one of the few remaining opportunities to enter the market at such an attractive price level.

Even though gold might have fused, one thing is clear that trouble lies ahead in the economy and in the markets. When we rationally and calmly assess the facts, the interest rate environment, the widespread economic weakness and the intense volatility in equity markets all point to a precious metals rally. The long-term picture and the fundamentals are exceptionally positive for gold and silver, that have already shown strength and once again confirmed their value as safe havens.

Leave a reply