Historically, gold prices have been influenced by certain market conditions and have been the antithesis of the stock market. As the U.S. economy grew weaker and interest rates dropped, most experts expected the price of gold to shoot up as investors fled a risky market for the safe-haven of gold. However, the expected massive spike in the price of gold never occurred, leading many in the industry to rethink gold’s place in a portfolio.
Over the last few weeks, global equities have fallen to a two-year low, yet gold never rallied. In fact, according to Bloomberg Business, “gold’s volatility rose right along with a measure of equity turbulence, diminishing its appeal as a haven. As stocks started to recover, the metal kept falling because of reports that signaled gains for the U.S. economy.”
Gold bucking its historical trend has been frustrating for investors. Many financial professionals went heavy into gold expecting the slumping markets to boost gold prices. Instead, the stock market rallied killing any hopes of a jump in gold at this time.
“A good test for gold was the latest round of volatility, and gold did not do much, since it has become unattractive as a safe haven,” Atul Lele, who helps oversee $5.1 billion as the chief investment officer at Nassau, Bahamas-based Deltec International Group, told Bloomberg Business.
Despite recent market trends and many analysts wondering if gold is no longer a safe-haven, there are many reasons to remain optimistic about gold’s future.
Why Gold Is Still a Smart Investment
The yellow metal’s largest obstacle has been the complete lack of inflation after the Federal Reserve implemented its Quantitative Easing (QE) program in order to stimulate the economy. Most experts still remained baffled by this, and continue to issue statements that inflation may still happen at any time.
Hyperinflation Ahead?
Ron Paul recently took to his YouTube channel in order to warn investors that there are “big changes coming for the U.S. economy.” He believes that QE created another economic “bubble” and we are on the verge of having to pay the piper. He fears that the inflation we have been avoiding will eventually make an appearance and it won’t be pretty. If Dr. Paul is proven correct, a hyperinflation scenario could spell doom for the U.S. dollar, making physical gold a very attractive investment.
Increased Demand for Physical Gold
Another reason to not write off gold is the increased physical demand from India and China, which make up almost half of the global market for gold. According to the Wall Street Journal, since late July, large Indian and Chinese retail investors have increased their buying of physical gold.
“Both gold investments and jewelry buying is seeing some recovery from a low base, “ Jammy Chan, head of Greater China for Gold Bullion International, told the Wall Street Journal.
In addition, China’s economic issues have shown no signs of dissipating even after the surprise devaluation of the yuan. This is a strong sign that even though the Federal Reserve may raise interest rates because of positive economic data in the U.S., the global economy is still struggling and gold is a global commodity.
“Gold will probably see some buyers return after investors realize there will probably be one rate hike this year, and that too, not a very big one,” Dan Denbow, a portfolio manager at the $820 million USAA Precious Metals & Minerals Fund in San Antonio, told Bloomberg Business.
Big Financial Firms Buying Gold
Finally, a recent report from Seeking Alpha, has shown that both Goldman Sachs and HSBC, two of the world’s biggest players in the commodities market, have recently made large purchases of physical gold for their own house accounts. This occurred even after Goldman Sachs issued a statement recommending that investors play the gold market on the “short side.” Both of these financial companies invest millions of dollars into research in order to know what we do not. So it really does make one wonder what they know that would lead them to buy tremendous amounts of gold for themselves.
Lately gold has not followed its historical trends, but neither has the global economy. We seem to be in uncharted waters. What does seem clear, however, is that the economic problems are not going anywhere anytime soon and there are many signs that they may get worse before they get better. Physical gold in a portfolio may just prove itself as a safe-haven once more.