Leave Stocks Behind as the Gold Price Shows Strength
The time has come to consider unloading some stocks from your investment portfolio. As an alternative, it’s time to reconsider gold—especially because the low gold price likely won’t stay low for much longer.
The current Dow Jones highs in the midst of domestic and international political uncertainty beg for prudence.
Consider taking a flight to quality, of the kind established over millennia.
Gold has been the asset of choice for jewelry and precious objects since 5,000 years ago (Mesopotamia, Egypt) and for coinage since 800 BCE—almost 3,000 years ago.
Investors have forgotten about gold lately, given the megalomaniac equity markets.
The all-but-expired course for cryptocurrencies (down by some 80% from their highs) and the abundance of risks and potholes that stocks are confronting mean the yellow metal is likely to rebound in popularity.
The Gold Price Is Set to Increase as Fear Grows
The price of gold has already started to reflect the gradual re-emergence of fear on Wall Street. It has not taken long for gold to re-establish a floor price of about $1,200 per ounce.
Admittedly, the below gold price chart does not inspire much confidence.
Chart courtesy of StockCharts.com
Yet, consider it in the context of the obstacles that gold has encountered over the past three years—that is, since Federal Reserve Chair Janet Yellen announced in December 2015 the gradual termination of quantitative easing.
The Fed’s resumption of successive nominal interest rate hikes has penalized gold.
Yet, investors, the financial media, and many analysts have chosen to discount the ghosts that continue to haunt the global economy and the markets 10 years after the collapse of Lehman Brothers Holdings Inc. on September 15, 2008.
Simply put, despite the Wall Street records, there’s a sense that many investors worry about the health of the financial markets. These fears are going to provide the necessary lift for the gold price to soar again.
There’s no denying that Wall Street and many of its global counterparts ended 2017 with a turbo boost and started 2018 with nitrous oxide.
Stocks Are Defying Odds But Circumstances Are Odd
Despite many concerns about political stability in the United States (the shadow of impeachment has plagued the Donald Trump administration before it even formally began in January 2017), stocks have seen a steady upturn.
Euphoria and “irrational exuberance,” as Alan Greenspan described the gung-ho markets of the mid-1990s, have been the engines of Wall Street’s performance far more than any convictions rooted in reason.
But as anyone who’s ever been young knows, every good party comes to an end. And not all ends are calm and smooth. Some are abrupt and come with a hangover.
Apart from any side effects from too much partying, stocks have achieved such incredible valuations (often for flimsy motives, not to mention being aided by tax cuts and buybacks) that they’re unable to surprise us any longer.
In other words, stocks have gone so far up that, like the mythical Icarus who flew too close to the sun with wings of wax, they have become vulnerable to their own success.
The Dow has resumed trading above 26,000 points. Still, high-profile stocks are showing considerable weakness—Tesla Inc (NASDAQ:TSLA) for example, but Facebook, Inc. (NASDAQ:FB) as well.
Thus, they have achieved such lofty valuations as to finally cause investors to pause, think, and ask important questions. The potential for setbacks is higher and the consequences more forbidding to ponder.
A Gold Short Squeeze
Though I’m not a big believer in chart patterns, some say seasonality has caused the price of gold to suffer.
The argument suggests that, for the past 30 years or so, the best period for gold prices runs from September to December.
That’s certainly possible. But it’s not necessary to rely on such tea-leaf-reading approaches. The value of gold will rise because logic is on its side, now more than at any other time in the past few years.
And if you don’t trust logic, trust the fact that short positions against gold have reached record levels. (Source: “PRECIOUS-Gold rises slightly as soft U.S. data tempers rate hike views,” Reuters, September 12, 2018.)
Should gold’s recovery continue as many expect, given a slight weakening of the U.S. dollar, the short sellers—including several hedge funds—will face a squeeze, adding fuel to the rally.
If the short squeeze fails to materialize, there are other factors that are shaping up in favor of gold.
Trade Tariffs and Emerging Market Trouble Boosting the Gold Price
The trade tariffs and sanctions against Iran (one of China’s key oil suppliers) have triggered a rush to buy U.S. dollars in several emerging economies. The related crises in Turkey and Argentina represent merely the two better-known such cases.
The general phenomenon over the past summer has been one of worried investors in emerging economies—and speculators exploiting the weaknesses—buying up dollars. Evidently, this has caused the U.S. dollar to appreciate over other currencies and over gold.
Russia faced this problem years ago, in an especially intense manner since 2014, when the Barack Obama administration imposed sanctions over Moscow’s absorption of Crimea.
Moscow’s solution was to gradually sell off its dollar reserves while acquiring huge amounts of physical gold.
In the face of a trade war, China could retaliate by selling off U.S. Treasuries while increasing its gold reserves.
Likewise, troubled emerging markets such as Turkey, Argentina, or even Venezuela may start to build up their own gold reserves as a shelter asset.
Moreover, in the face of a potential trade war, Federal Reserve Chair Jerome Powell may decide to put the brakes on the interest rate hikes, weakening the dollar.
But while there’s always the chance that Powell could reverse the interest rate hike, investors may interpret the move as an admission of economic weakness.
That Would Add Support Behind a Potential Gold Rally
The dollar’s rise has doubtless impacted negatively on the price of gold. For the time being, the dollar will remain the leading factor influencing gold prices.
Indirectly, however, the dollar will suffer from the very factors that typically affect, and benefit, gold.
Geopolitical risks have increased sharply, leading the world to the brink of various dangerous scenarios: Syria, Iran, and Russia—not to mention China and North Korea.
The dollar will come under pressure. Even the European Union, frustrated by the inability to react to U.S. dictates over where and with whom Europeans can conduct business, will look for ways to cut dollar dependency.
A rally appears to be brewing, pushing the price of gold toward and beyond $1,300 per ounce by the end of 2018. And gold prices could go far higher than that in the next few years.