We start the year with higher gold and silver prices caused by geopolitical tensions in the Middle East. Also contributing to the higher price of Gold this morning is the decline in the world equity markets.
China setting the tone for the world equity markets this morning. A 7-percent drop in the Shanghai Stock market triggered circuit breakers that halted trading on the first trading day of 2016. The main contributing factor to the Shanghai decline this morning was the news that China’s manufacturing surveys show that factory activity slowed for the 10th straight month.
On the opening bell of the Dow this morning, we see the industrial average down over 300 points on concerns of China’s data, escalating Middle East tensions and higher oil prices.
In the middle east, Gold is finding safe haven status after Saudi Arabia broke off ties with Iran when protestors stormed its embassy in Tehran upon hearing the news of the execution of a popular Shiite Muslim cleric. The price of crude oil is higher today by 2 pct. because of the actions of the Saudis, the world’s largest exporter of oil.
Wall Street traders back from their long Christmas holiday indicate that they are forced to take on a defensive position covering their small short positions carried over from last year. After speaking to some traders this morning, it appears they expect 2016 to be the same as 2015. Many looking at a decline in the price of Gold and Silver around 15 percent, weaker than the 13 percent decline
in both metals in 2015. I’ll take the other side of that trade. I expect metals will be higher this year because of tensions building in the Middle East. I believe countries will be forced to pledge their allegiance to one side or the other, making it even more important that we have the proper commander in chief in the White house next year. If the world markets decline, I expect any increase in the Fed fund rate will be put on the back burner for a while giving me more confidence that a higher price of gold is in order for 2016.
With the news out this morning, some retail brokers expect clients to take some profits off the table and look for alternative investments in the new year. Some financial advisors indicate that clients will be looking at bonds or precious metals as alternate investments in 2016 if equities decline due to world economic pressures and escalating Middle East unrest.
Nonetheless, in the event that our markets go higher and the demand picks up in 2016, don’t look for the refiners or the mints to make more product available. Most are reporting status quo for 2016. I have not heard of any mint or refinery hiring more folks or buying more equipment in 2016.
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.