Gold Has Risen over $270 an Ounce in 2016
The price of gold had fallen steadily since August 2011 when it hit an all-time high over $1900 an ounce. Gold fell 45% from its August 2011 highs in December 2015 when the price hit $1050. While the price of gold is still far from its all time high, the gains so far in 2016 have been impressive and took many market observers off guard. Gold is one of the best performing commodities in 2016 and has attracted the attention of major hedge fund manager and retail investors.
The Price of Gold in 2016 vs. Oil and the Dollar Index
What has caused the sudden and dramatic turnaround in the price of gold?
Gold does well in times of uncertainty because gold is a rock, impervious to the actions and follies of humans.
Central Bank Policies
For the past several years the Bank of Japan, The U.S. Federal Reserve, The Bank of England and the European Central Bank have engaged in highly accommodative monetary policies that involved massive asset purchases and the lowering of interest rates to zero or into negative territory. Such measures were intended to be temporary and provide a much needed boost to global economies. Rather it is becoming clear that these policies instead of being temporary are becoming permanent fixtures.
In 2016, the Bank of Japan, ECB and Bank of England all increased their stimulus programs. The U.S. Federal Reserve has for more than two years indicated it would be increasing interest rates. Yet, to date the Fed has only managed a one quarter percentage point rate hike. Low, no or negative interest rates make gold more attractive vs government and other bonds as gold does not carry a default risk.
Slowing European, Japanese and Chinese economic growth has led to economic uncertainty that also calls into question the efficacy of central bank policies that were supposed to boost growth. When central bank policies are ineffective, they generally double down on them and lower interest rates further and increase the stimulus. Global stock markets opened the year lower that they had in decades due to economic jitters. By March they had recouped most of their losses. Stocks fell hard again after the Brexit vote in late June but recovered in in July. Gold, in contrast has marched steadily higher re-cementing its role as a safe haven in uncertain times.
Perhaps even greater than economic uncertainty in 2016 has been the continued political uncertainty. The Brexit vote and its aftermath has held Great Britain and the Eurozone in a state of uncertainty, first as to which direction the vote might take and secondly what the impact of Brexit might be on Great Britain, the rest of Europe and the world. Would other countries in the Eurozone attempt to leave the Eurozone? How would Brexit be structured? When might it occur? Would it happen?
European Migrant Crisis/Terrorism
During the year of Brexit, Europe experienced a migrant crisis and a series of high profile terrorist attackes mainly centered in France and Germany. The migrant crisis has not been resolved and parts of Europe are in states of emergency on guard for the next terrorist attack.
U.S. Political Uncertainty
There is politcal uncertainty in the United States. Both Democratic and Republican Presidential candidates add an unprecedented level of uncertainty. For the first time, the United States has had a major candidate, Democrat Hillary Clinton, under FBI investigation during the entire primary season. Having escaped a recommendation for criminal prosecution, Ms. Clinton’s Clinton Foundation is currently subject to an Internal Revenue Service investigation. Damaging wikileaks on the shady inner workings of the Democratic National Committee have been released with more threatened to be released. Hillary’s presence in the Presidential race promises to provide continued surprises that will add to political uncertainty as would her presidency as further leads and results of investigations may be released while she is in office.
Republican Donald Trump adds his own brand of uncertainty to the Presidential race. During the primaries, Mr. Trump delighted or disguted many with an endless stream of politically incorrect statements. Because Mr. Trump has never held political office it is hard to judge how he may behave as President. Occasionally, we get glimpses of how he would conduct his Presidency. Mr. Trump’s statements about building a wall along the U.S. border with Mexico and U.S. NATO and World Trade Organization participation have startled the establishment. It doesn’t seem like Mr. Trump will stop speaking his mind as the Presidential campaign enters its final months. As such, the uncertainty of what Mr. Trump might say during the campaign or what he might do as President will continue to contribute to an uncertain political environment.
We expect political and economic uncertainty to continue. Whether that will continue to be positive for gold we cannot say. Whether gold’s recent rise is the beginning of a spectacular multi-year bull run or destined to flame out, no one can say. Retail investors that buy gold for the long term often engage in a practice called dollar cost averaging; i.e. buying modest amounts of gold at regular intervals in order to protect against mistakes in market timing that may result in buying too much at high prices and not having enough resources to buy at lower prices. While no investment is entirely safe or any investment strategy fool proof, dollar cost averaging can reduce some of the risk caused by swings in the price of gold.
The foregoing information regarding the price of gold and dollar cost averaging is provided for informational purposes and is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action. Prior price action of gold on the up and downside may not be indicative of future silver price action. The historical prices of gold are retrieved from third party sources deemed to be accurate. BGASC makes no representation, however, as to the accuracy of such information and assumes no responsibility to correct or update any information provided above and assumes no responsibility for reliance on such information.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.