You’d think that at this point, after all these years, Central Banks would know exactly what worked and what didn’t. But just like any other industries that rely on trends for survival, the banks are paying a heavy price for relying too much on assumptions.
It’s one thing to be uncertain about the future. It’s quite another to be oblivious to the present. That’s the kind of complacency that could prove disastrous in a world gone awry.
Gold’s Price Rise Predicted By Several Indicators
Since peaking at just over $1,400/oz. in early January, the price of gold (GLD) has steadily risen, breaking through several important resistance lines along the way. At one point, the gold price even briefly touched $1,600/oz., which is historically significant as it’s within shouting distance of the major $1,600 line that once confounded many amateur and experienced gold traders alike. In fact, just a few months ago, many were still wondering if this year’s gold price rise would finally be the one that broke through and brought the commodity back to more typical price ranges.
The Case for a Gold Selloff
While the recent rise in the gold price is a clear sign of things to come, it doesn’t mean that all other commodities will follow suit. In fact, the opposite is often the case. When the popularity of a certain asset or commodity class increases, so does the demand for everything related to it, including the underlying asset. And in today’s world, that means a likely fall in the price of just about everything.
Take crude oil, for example. Due to its many industrial applications, a rise in the cost of crude oil typically means a rise in the cost of just about everything from gasoline to plastic straws. As a result, many commodities experienced sharp drops in prices during the last year. But not gold. Because of its relatively low liquidity as a market, most people consider crude oil a poor choice for investment. But there are several examples of how the price of crude oil fell during a time of increased demand. Between October 2016 and January 2018, the price of crude oil fell by 38%, from $50 to $28/barrel, which is almost perfectly in line with the 36.8% rise in the price of gold over the same period.
What About The Fed?
The effect that the Federal Reserve has on the gold price is typically very short-lived. Aside from temporarily lowering interest rates to incentivize borrowing and spending, the Fed doesn’t tend to have a significant impact on the gold price as long as other factors remain in play. Which they usually do. The main thing keeping the gold price from falling is the fact that the industrial economy as a whole is doing just fine. Thanks to the combination of reduced borrowing costs and growth in gold demand, as indicated by the increased use of gold in jewellery worldwide, the gold price has been relatively stable over the past year. So much so, that many commentators are now wondering if perhaps the recent run in the gold price was a little overdone.
For instance, writing in Bloomberg today, Christopher Dempster states that while increased demand for jewellery is a positive sign for the gold price, the sustained nature of the rally is starting to worry him. In an interview with Bloomberg, James Rickards, an economist at FTN Financial, echoed Dempster, noting that while the long-term picture is positive, the recent parabolic rise in the gold price seems unsustainable in the long run. He went on to predict that the gold price will eventually fall back down to earth, reining in the excesses of the last few months. So much so, that he sees the yellow metal hitting just $1,200/oz. before the year’s end. (As it happened, the gold price reached a peak of $1,600/oz. on March 25th, just eight days after the interview was recorded.)
The Yields On Treasury Bonds Fell Again
Over the past year, short-term Treasury bond yields have declined steadily, breaking through several important support lines. Currently, the 10-year Treasury yield is sitting at 2.7%, which is its lowest level since late 2014, reflecting investors’ newfound confidence in the economy and their desire to play a longer game. At the same time, long-term Treasury bond yields have risen to multi-year highs, again signaling increased speculation in favor of the global economy and a possible decline in the US dollar’s value.
From a historical perspective, multi-year highs for long-term Treasury bond yields are relatively uncommon, with only four other instances – 1989, 2000, 2007 and 2018 – being able to make that claim. So while the recent rise in the gold price might offer some level of comfort to those worried about inflation, it’s also a warning sign for those who expect the US dollar to continue to decline in value due to increased speculation in favor of a rise in gold price and away from the greenback.
The Impact Of Rising Interest Rates
One factor that could lead to a decline in the value of the dollar and a rise in the price of gold is a rise in interest rates. For decades, interest rates have remained low and steady, which has undoubtedly benefited savers looking to protect their investments from inflation. With the economic and political uncertainty that has arisen in recent years, coupled with an already elevated level of interest rates, it’s no wonder that many investors are seeking the perceived safety of investing in gold.
But just because interest rates are rising doesn’t mean that all other commodities will follow suit. In fact, it’s often the opposite. When interest rates rise, so too do the prices of stocks and bonds that are sensitive to rate movements, such as mortgage-backed securities, corporate bonds and high-yield bonds. In other words, as interest rates rise, it becomes more expensive for companies to secure loans, which in turn makes them cheaper to buy.
If you’re looking for an investment that will give you a good return with few risks, then short-term Treasury bonds, along with the underlying assets they represent, such as mortgage-backed securities, could be a good choice. The long-term bond market is still rather volatile, though, so it would be unwise to put all of your investment eggs in that basket.
Demand For Gold Hits Record Levels
According to the APMEX, the demand for gold reached a record high in 2018, with shipments reaching a level last seen in 1988. With industrial production still on the rise, and economic and political concerns weighing on the minds of global citizens, many have been seeking safe havens, including the gold market. And just like that, the yellow metal rises to the occasion, providing easy wealth to those who hold physical possession of the metal.
The demand for refined products, including metals and metal-based products, increased by 3.1% year over year in 2018, while the demand for unrefined products (mainly crude oil and gas) fell by 7.7%. As a result, the demand for metals and metal-based products increased by 16.8% year over year in 2018.
With the dollar losing value and the cost of living increasing, more and more people are wanting to invest in a tangible asset that won’t devalue, plus there’s the appeal of the limited-quantity gold market, which is seen as a safe and profitable place for investment.
Demand For Palladium Exceeds That For Gold
While demand for gold soared to its highest level since 1988, demand for palladium reached a comparable level in 2018 only during the final quarter of the year. As the demand for industrial products continues to rise, so too does the demand for the metal that’s often used to make them, including cars, planes and more. (Interestingly, the rise in demand for palladium also coincided with a 12% increase in the cost of fuel.)
Palladium is seen by many as the metal of choice when investing in a wide variety of products, including the automotive industry, due to its extremely high abundance and cost-effective price. In other words, like gold, palladium is seen as a safe haven for investment, though the appeal is perhaps somewhat wider since there are more options, and thus opportunities, for investors to profit from. Plus, there’s the additional appeal of possibly getting a better return on investment (ROI), especially if you’re looking for a long-term investment.