Downside verse the Upside
It may just be my natural bias, but it seems the “anti-gold bugs” have more animosity and emotion when expressing their views on gold then the gold bugs have in their excitement for the yellow metal. And there is absolutely nothing wrong with being bearish on gold at present time. Especially as the trend following the undeniable strength of the US dollar and chatter of the US Federal Reserve hiking interest rates gives little reason or evidence to go against consensus. But the “anti-gold bugs” are wrong to rejoice or point out the fact that gold has failed to rally when fundamentals should suggest otherwise. That is simply incorrect.
The most common examples or better, what have been misconceptions of the failed rallies in gold in recent weeks are the China stock market turmoil and fears of a Grexit, or Greece exiting the Euro currency. We’ll examine both.
There are still reasons to be worried about the issues in financial markets in China, despite being absent from the headlines this past week. The list of measures that were taken to support their market makes it essentially improbable for them to retreat any further. At one point in recent weeks, half the publicly traded companies on the Shanghai and Shenzhen exchange were halted from trading for multiple days. China’s central bank was directly financing a crown corporation to actively buy equities. Shareholders with greater than 5 per cent ownership of any public company are banned from selling for six months. Derivative markets and short selling have been banned. The list goes on. To suggest that financial instability in China generates demand for gold implies liquidity, which is non-existent.
Story number two is Greece. And this is more a story that fits into the greater trend in financial markets, which is the slow decline of the euro. In this kind of economic setting money has been gravitating towards the US dollar. The European Central Bank is extremely active in European debt markets, and has a higher probability of becoming more accommodative than less. The US is getting more and more likely to raise interest rates come September. This world is being weighed on a relative basis and although gold bugs, perhaps to a fault, see too many problems ahead for the US economy, compared to the Eurozone or elsewhere in the world, its clear why capital is headed towards the United States for the time being.
The question then, is where that leaves us with gold. It’s been a while since I’ve pounded the table and made a bullish case for precious metals. This still might not be it. I believe in accumulation and I believe in allocating a small percentage of your portfolio to physical gold as insurance. Especially in a world that is so tied currently to decoupling with the US economy, gold is not only the natural hedge, but the perfect hedge.
The other point to make is how much downside a person can be comfortable with. Investing in physical metal as a hedge against geopolitical uncertainty and US dollar instability is one reason. But if gold has a floor of 950 or 1000 USD per ounce, is it worth risking that capital to be invested if, or when this market turns.