Markets reflect both the short-term expectations of traders and the inexorable forces of long-term realities. Concerns over the U.S. and global economic and political environment drove fervid gold buying in early 2016. Then the election of Donald Trump to the presidency infused optimism into the markets, causing gold and silver prices to give back some of their exceptional gains for the year. Ultimately, wise investors see opportunities in both financial climates.
Economic Crisis in Europe
The factors that existed in early 2016 are still weighing on the markets as we move into 2017, and, in fact, the news has gotten worse. Just consider the debilitating issues facing the European Union: 1
- The Italian voters rejected the reforms that experts believe are necessary to prevent bank failures and save their economy. 2
- German financial icon Deutsche Bank faces serious threats to its survival.
- Greece, Cyprus, and Portugal continue to be catastrophes-in-the-making for the euro and all of Europe.
- While Spain has crawled back from the economic abyss, it is still only limping along and is not strong enough to survive any major shocks to the euro.
The key here is that any one of these individual crisis situations has the potential to create a contagion that will affect nations globally. Investors buy gold for a safe haven in times of expected difficulties, and they buy the yellow metal in massive quantities when those difficulties become realities.
Dangerously Strong Dollar
Recent interest in the U.S. dollar reflects the effect that short-term expectations like the ones the U.S. election piqued can have on the markets. 3 However, the irony in this scenario is that the vast majority of market observers, economists, and analysts are quick to point out that a strong dollar is neither sustainable nor desirable.
The net result of the policies currently being discussed by the members of the new administration will result in higher inflation and, ultimately, more focus from global trade partners on their currencies. 4 While there are short-term benefits to an economic boost at home, they become a liability if the rest of the global economies continue to suffer. 5
Of special interest in this area of global economic concern is China. The nation simply can’t bear the impact of a strong dollar over the long term and is certain to react in ways that create even more global uncertainty, such as continuing to reduce interest rates while resisting a devaluation of the yuan. 6
Gold Investing Opportunities
If you’re watching the markets, you can expect to see them respond to short-term optimism while eventually pricing in economic realities. This trajectory will prove favorable to gold investors in two ways. First, the near-term dips in gold prices that positive economic expectations create will present buying opportunities. 7
Secondly, if and when any of the potential trigger events occur, gold buyers have the potential for significant increases in the value of their holdings while enjoying a solid hedge against inflation that protects the value of their portfolios.