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It will “Too Soon” be “Too Late” to Buy Gold – Buy while its yet “Too Cheap”

It will Too Soon be Too Late to Buy Gold - Buy while its still Too Cheap

It will “Too Soon” be “Too Late” to Buy Gold

Gold’s qualities make it one of the most coveted metals in the world and a popular gift in the form of jewelry. What about the yellow metal in an investment portfolio? At U.S. Global Investors we carefully monitor the price of gold and what drives its price action. These are our 10 reasons why we believe bullion should be part of a balanced portfolio.

Number 1: Gold has a long history of storing value. Since the discovery of gold thousands of years ago, it has been a coveted commodity and store of value. Although global currencies are no longer backed by gold, it remains highly valued, particularly during economic downturns when many other assets depreciate.

Number 2: Inflation is historically good for gold. Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Inflation eats away at cash and Treasury yields, making them less attractive as safe haven assets, which then leads many investors to gold.

Number 3: Gold jewelry demand is ever-rising in China and IndiaOne of the biggest factors driving the gold price is what we call the Love Trade, or the seasonal gift-giving of gold jewelry prominent in China and India, the two largest bullion consumers. With rapidly growing middle classes, demand is expected to rise even further. In fact, gold jewelry ownership is so widespread in India that as of 2016, Indian households owned more gold than the top six central banks combined.

Number 4: World gold supply is shrinking. Gold is both scarce and finite – another reason why it’s so highly valued. Fewer gold mines are being discovered today because exploration budgets are shrinking and mining costs are rising. The “easy” gold may have already been mined. With lower annual gold production and rising demand, existing gold could become more highly valued.

Number 5: Global government debt is skyrocketing. Total global government debt is at an all-time high, with around $120 trillion added since 2008. Another financial crisis could be in the works due to the growing risks of such large deficits. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction, such as gold.

Number 6: Central banks are adding to their bullion reserves. Since 2010, global central banks have been net buyers of gold as they move to diversify their reserves, with net purchases totaling 371 tons in 2017, according to the World Gold Council. Central banks buying gold to store value is a sign that investors too might want to hold some gold in their portfolio.

Number 7: Gold is inversely correlated to the U.S. dollar. Because gold is priced in dollars, its value increases when the dollar contracts. Bullion and the U.S. dollar have a long history of trading inversely. In fact, gold often outperforms most major currencies on an annual basis.

Number 8: Negative real rates. One consequence of strong inflation is that real rates—what you get when you subtract the current consumer price index (CPI) from the nominal rate—can turn negative. And when this happens, gold has typically been a beneficiary. This is the Fear Trade in action pushing investors into perceived safe haven assets.

Number 9: Bullion is seen as a safe-haven during times of political instability. Just as investors flock to bullion during financial instability, many also do so in times of rising world tensions and geopolitical turmoil. For this reason gold is sometimes called the “crisis commodity” and its price often appreciates the most when confidence in governments is low.

Number 10: Gold is one of the best portfolio diversifiersHistorically, gold has reduced losses during periods of economic distress or instability in the markets and helped to improve portfolio risk-adjusted returns. It is a mainstream asset as liquid as other financial securities and its correlation to major asset classes has been low in both expansionary and recessionary periods. – MarketSlant

How Gold Prices Will Break Out Of The $1,300 ‘Trap Door’

Anna Golubova – The gold market will not repeat last year’s frustration and get stuck below $1,300 an ounce level for too long, according to one analyst at Mitsubishi.

The yellow metal’s drop below $1,300 an ounce has turned this year’s support level into a “something of a trap door,” Mitsubishi analyst Jonathan Butler told Kitco News in an interview on Tuesday.

“That $1,300 level was seen widely as a support level throughout this year,” Butler said. “And having gone below it, we struggle to see any upward momentum back towards $1,300, but we still have some reasonable support and in the short-term we might start to see gold edge higher if the dollar gets a little more subdued.”

The U.S. dollar index will need to drop to at least 92 or 90, where it was much of this year, from the current six-month high of around 94. “That would be a very clear bullish signal for gold,” Butler noted.

The chances of the precious metal getting stuck below the $1,300 once again are looking quite low at the moment as several key things are different this year, Butler pointed out.

“We’ve got very clear path on U.S. rate hikes — at least two or three more hikes this year — and this has been priced in already. In comparison, in 2017 it was very much a “will they/won’t they” scenario for much of the year in regards to the U.S. rate hikes,” Butler explained.

The other big supportive gold driver this year versus last year is the equity market, Butler added.

“All the way through 2017, the U.S. stock market was reaching a series of all-time highs and that culminated in the record high we saw in January of this year. But, despite a record earnings season, U.S. stocks have failed to get back to where they were back in January,” he said. “There is still an element that the stock market could rally, but it is going to take something quite extraordinary given that a lot of the good news is already priced in at the end of last year, particularly the U.S. tax cuts.”

When it comes to getting above $1,300 and back to $1,365 an ounce, inflation will play a key role in helping gold prices, Butler said.

“Investors are concerned with real rates that is the inflation adjusted yield,” he stated. “And as inflation continues to pick up and go beyond the Federal Reserve’s 2% target, gold will remain supported as an inflation hedge. It should also keep the cost of carry for gold fairly low.”

In the short-term, gold’s price action will be choppy, trading on either side of $1,300, according to Mitsubishi. But, for the year as a whole, Butler is projecting an average of around $1,355.

“We will probably get back into the range of $1,300-$1,365 in fairly short order. We look at the technical charts — we haven’t really broken down below the uptrend that can be traced back to the middle of last year, so there is still some technical support coming in even though we’ve gone below the 200-day moving average and below $1,300 psychological level.”

In the second half of the year, the gold market will also have some tailwind in the form of physical demand in Asia, triggered by the wedding season and Chinese National Day.

“Those are are not things that necessarily lead to a strong rally by themselves, but they should lead to some decent support on the downside,” the analyst said.

Last week’s drop below $1,300 was a surprising one, Butler highlighted, noting that there was lots of optimism across the precious metals sector.

“It happened to be one of the biggest single-day moves of this year. The fact that it took out the 200-day moving average in fairly short order led to some stop-loss selling that probably exaggerated the move downwards,” he said.

Butler doesn’t rule out more geopolitical uncertainty in the near-term, especially with the U.S. midterm elections coming in November.

“The overall geopolitical tension is still there in terms of North Korea and the Middle East and that would seem to suggest that investors will be hopping onto gold to some extent in the weeks and months ahead in preparation for this extraordinarily volatile time, especially when we consider we have U.S. midterm elections in November, which could change the political landscape somewhat and it could weaken the dollar,” he said.

How U.S. Sanctions On Iran Could Boost Gold Prices

Here’s some good news for the gold bugs.

The recently announced U.S. sanctions on Iran will likely give a boost to prices for the yellow metal.

At least that’s according to one analyst who has studied the bullion market for decades. The skinny is below.

The news should come as some welcome relief to anyone who owns the metal as its performance hasn’t been exactly stellar of late. The price of gold was recently trading around $1,293 a troy ounce, down from an average of around $1,332 in January, according to data from the London Bullion Market Association, a U.K.-based metals market trade group.

The sanctions on Iran not only make it illegal for U.S. people (including businesses) to trade with Iran but also severely restrict the use of any financial institution connected with U.S. banks or the U.S. financial system.  Given that the banking system across much of the western world is intimately intertwined, the sanctions all-but prohibit the use of any major bank in connection with Iranian trade.

What about using precious metals? “The U.S. government is trying to turn off that loophole that was well exploited in the last round of sanctions,” states a recent report from New York-based commodities consulting firm CPM Group.

Unfortunately, the U.S. government is unlikely to succeed in that part of its goal, CPM says.

Part of the reasoning is that gold has a long history of use when other currencies are unusable. On top of that, gold has long been used in Iran, both by the government and the people, both to store value and to skirt sanctions.

“One of the historical values of gold is the ability to use it in all sorts of circumstances,” says Jeff Christian, founder of CPM Group, and who has decades of experience navigating the murky world of gold and other precious metals.

In other words, even when payment through banks won’t work, gold is frequently an acceptable medium of exchange.

Also, Iran has a significant inflation problem that makes holding the local currency, the rial, a problem for anyone looking to preserve the purchasing power of their wealth.

“Private Iranian citizens and companies also use a lot of gold,” states the CPM report. it continues:

The Iranian currency, the rial, is pretty much worthless thanks to decades of revolutionary Islamic governance and many years of sanctions. No one wants to hold their wealth in rial, so they buy gold.

Put in the simplest terms, gold is a better asset to preserve spending power than the paper money printed by the Iranian government. Inflation in Iran is currently running at an annualized rate of more than 70%, according to estimates from Steve Hanke, professor of applied economics at the Johns Hopkins University. That figure will likely get higher because of the recent plunge in the value of the currency following the U.S. sanctions announcement. The net result will be that demand for gold inside the country will increase.

But perhaps most important when it comes to boosting gold prices is the fact the Iranian government is well practiced in selling oil for gold.

“If you go back to the period before 2015 Iran was one of the largest places for gold demand at times,” Christian says. He explains, that before sanctions on Iran were lifted under the Obama administration, Iran’s oil company, which is state-owned, sold oil to traders in exchange for Turkish lira and then used the lira to buy gold.

Now it seems more likely that Iran would go straight to selling oil directly for bars of gold. That’s because the value of the Turkish lira has been plunging lately due to the poor economic policies being pursued by the country’s president Tayyip Erdogan. Back in September, one U.S. dollar would buy 3.4 Turkish lira whereas recently it would fetch 4.74 lira, according to data from Bloomberg. The currency situation doesn’t look like it will be solved anytime soon either so making trade in Lira harder.

What this all means is that there will likely be increased demand for gold according to the CPM report. It states:

The result is that the overall movement by the U.S. government against Iran announced on 8 May is likely to further stimulate demand for gold in Iran.

That extra demand will likely help gold prices get a boost. – Simon Constable


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