Gold Soars On Currency Uncertainty
The more things change, the more some things stay the same. And investors are now realizing that the one constant in all this volatility is gold.
Even in an era where we’ve become accustomed to whiplash-inducing volatility in the markets, recent trading sessions manage to stand out like a sore thumb.
On Tuesday, the Dow posted a wild, 424-point trading swing. Yesterday, a disappointing retail sales report sent stocks, Treasury yields, the U.S. dollar and commodities all plunging.
The only thing that wasn’t plummeting was gold. In fact, it was up nicely throughout the trading session, before sliding just barely into the red by the end of the day.
And then, today, the Swiss National Bank shocked the world by announcing it was ending the Swiss franc’s peg to the euro. This essentially confirmed that the European Central Bank is going to launch its own quantitative easing program next week.
And gold has soared $30 on the news.
It’s truly amazing to me how even the most strongly held consensus view on the markets and the economy can suddenly flip 180 degrees.
Remember way back — like last week — when everyone was so convinced that the U.S. economy was locked into a recovery ... that the dollar was invincible...that U.S. stocks were headed for the moon...and that the Fed was going to raise rates at least a couple of times this year?
Flash forward to today, and no one is sure about any of that.
In fact, I have the MarketWatch.com home page on my computer screen right now, and the headline is “How To Defend Your Money From Emerging Bear Market.”
What a turn-around.
There are two important things I want to point out to you in this letter:
First, the kind of volatility that we’re seeing right now in stocks is not the kind of thing you see in a strong bull market. Quite the opposite: It’s precisely the type of market behavior that accompanies major market tops.
So be careful, and hedge your bets.
Second, gold is attracting “safe haven” buying right now. But unlike the kind of flight-to-safety buying based on geopolitical crises — which I always advise investors to avoid buying into — this is safe haven buying based on currency uncertainty.
In other words, investors are buying gold because they realize it’s the one currency that isn’t going to be debased over the coming months and years.
Interestingly, although today’s rally in gold is quite encouraging, it obscures an impressive performance by the metal over the past few weeks.
The metal has been slowly but surely rebounding from a late-December decline to $1,174, when traders used the thinly traded holiday markets to force the metal lower. But, on the back of heavy Chinese buying at these artificially low levels, and a natural rebound after the turning of the calendar to 2015, gold climbed back above $1,200 and kept on going.
Importantly, after it had established a closely-held inverse relationship to the dollar for awhile, gold began to buck that trend last week by gaining in the face of a strong dollar. In other words, it began rising not only in terms of the U.S. dollar’s trading currencies (the yen, the euro and the pound), but also rose in terms of the dollar itself.
This is the hallmark of a classic, monetary-based gold rally.
I’ve been telling my Gold Newsletter Alert readers to remain cautious, and that gold really needed to reach the $1,255 level or so before we could gain confidence that this rally has legs.
It’s trading above that level right now.
However, because it’s made that leap in one fell swoop today, I’d wait a day or so to see if gold’s able to repel the inevitable bear counter-attack before jumping on board.
But the bottom line is that there’s a growing recognition that a global currency war is in play. And while Switzerland may retain its neutral status in that war, the U.S. dollar will not escape the carnage.
Wild trading days like we’re seeing can distract us from the long-term view. So we need to step back, put on blinkers and focus on the big picture.
Doing so, we see that the downside risk for gold at these levels is relatively small, while the upside potential is quite large.
Conversely, there are myriad factors that could drive the metal much, much higher. First among these would be the potential for the Fed to postpone any rate hikes until next year...or perhaps even consider a return to quantitative easing.
These seemed like far-fetched ideas last week. Not so much today.
And, as we’ve just seen, it’s most likely that something out of left field...completely unexpected...will emerge as the next big driver.
And so, while it’s impossible to pin point when the big turn-around will finally begin, we can fairly judge that current levels are right around the long-term bottom.
Gold therefore presents us with a very attractive risk-reward proposition right now, and so do the associated resource stocks.
If you want another potential sign that we’re at the bottom, consider our recently concluded “Money, Metals and Mining” investment cruise. Held during an ultra-luxurious cruise through the Caribbean aboard the opulent Crystal Serenity, and featuring a blockbuster roster of experts, the cruise attracted the smallest number of investors in our history.
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference |
