Looking into my crystal ball for the rest of the year I see the following factors that affect the price of gold:
First let’s talk about the of price of gold and the US dollar. We all know the value of the US dollar and price of gold are inversely related. Because gold is traded in dollar terms, a weaker dollar will increase the value of gold. As witnessed so far this year, whenever the Fed hints at raising interest rates the dollar strengthens and gold sells off. Forgive me for repeating myself (I’m only trying to make a point), but let’s review, last week the FED said only 2 rate hikes are expected now in 2016, down from 4 previously predicted, and what happened? Gold rallied $32 dollars in an hour. Historically SUPPLY and DEMAND issues SHOULD be the major factor on which moves the price of gold, not Washington FED Governor’s comments. But this is only the beginning.
There are many factors that can cause a tsunami in the gold price, but you need to experience the RUMBLINGS before the big one hits our shores.
I’m here to report the rumblings have started. Gold hit a low of $1,046 late last year as the world started to experience negative interest rates in some foreign countries, which increased physical demand on their shores. No one in these countries can expect any rate of return from the banks with negative rates and some investors are worried about the buying power of their currencies going forward. So gold turns out to be an interesting investment. For some, the only choice.
Another factor you must be aware of is the increased volatility of late in the gold market. Program trading seems to be alive and well as algorithms play an important part in fast movements either up or down in the price of gold. Key words reported by news agencies can trigger the price of gold to move abruptly in either direction. These programs try to take advantage of significant news that hits the tape in hopes of either buying or selling gold before the market can react to the news.
Another factor in 2016 has been the incredible increase in ETF Gold holdings; up almost every day this year. Some equity investors are diversifying their portfolios while they increase their gold holdings as reported by some financial advisors. Historically, funds who participate in this market are usually short term investors, but it seems to me that even when gold has a big down day the Gold ETF increases its holdings.
When I first started in the gold business in 1976, my boss said, “The best advice I can give you to be successful in this business is not to talk about the following topics with clients: food, religion or politics. You don’t want to offend anyone.”
Well sorry John, in the year 2016 your third choice has to be a topic that we just can’t avoid. My next rumbling that could affect the gold market is to be put into two categories. The Presidential Election and the 19 trillion dollar debt we are facing. I for one believe either the Presidential Election, and/or the increasing National debt can be a significant factor in the price of gold this year.
Potential hostilities later in the year in who will be the Republican candidate AND our elected officials unwilling to address the debt can create turmoil in the markets. Ignoring the debt can cause a downgrade in the credit worthiness of this country. A factor we ignore every day. More rumblings.
So I come back full circle with binoculars watching for more signs the tsunami is underway. But, in my opinion, the last rumbling will be will be evident WHEN and IF we witness a backwardation in the price of gold. We should see the switches collapse to the left on the futures contracts. Where the spot price of gold is gaining aggressively in value over the most active futures month. (Backwardation values are limitless until physical finds its way back into the market) At this point it might be too late to look for your surf board to ride the wave. All the other factors have already weighed in.
Nonetheless, it just might be time to wax the surfboard and “LETS GET READY TO RUMBLE.”
Author Name: Walter Pehowich
Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.