Today’s news makes the case for why all investors should keep at least ten percent of the portfolio in precious metals. After stock market declines this week, we reflect on how quickly the markets for stocks, bonds, and other financial assets can change. The ability to “buy low and sell high” is every investor’s dream, but averaging the cost basis of gold and silver makes long-term financial sense.
It is true that precious metals prices soar during moments of panic. People worry about China’s economy slowing down or the U.S. stock markets’ consolidating. Either of these worries should not worry anyone. China’s economy has continued to grow at a remarkable rate for years and the U.S. stock market typically rests every five years or so. A bear market is overdue.
Interest Rates and Inflation
Concerns about the yield curve, interest rates and inflation are everywhere. Investment in almost any asset benefits from low rates with the exception of income investing and inflation-sensitive investments. Central banks around the world have recently indicated that the cost of money will start to rise next month through the end of the year.
Rates will rise with inflation. Income investors and fixed income asset managers are happy. For the past few years, real returns in fixed income have been negative or negligible. Investors are rebalancing portfolios in earnest. The stock market’s “nowhere to go but up” premise is unsustainable.
None of this information is new. None of the information should inspire panic. Markets rise and fall with supply and demand. A long-term and conservative approach to investing in gold and silver, stocks, bonds, and real estate benefits investors. Over the long-term, investors’ assets tend to rise in price.
An uncertain global economy tends to favor investment in gold. Gold is now up seven percent from five-year lows. Daily volume of futures contracts have approximately doubled the number of daily average. China’s currency devaluation or Greece’s possible Eurozone departure are certainly triggers. However, it’s also smart investing to buy when prices are low and the outlook for future price appreciation is high.
The Commodity Futures Trading Commission (CFTC) data, recorded since 2006, reflects the turnaround of bearish sentiment in precious metals. Short positions, or bets placed that gold’s current price will decline in future months, were covered at record rates this month. Long purchases, reflecting buyer sentiment that gold prices will rise, simultaneously increased. So-called “fast money” of hedge funds committed to these contracts shows that professional investors are bullish about a rising gold price.
Sovereign Gold Acquisitions
According to the World Gold Council, European countries’ appetite for gold increased over the past three months. In contrast, global market demand declined 12 percent to six-year lows. German buying of gold bars and coins increased by 24 percent in Q2 2015. Austria and Switzerland’s buying closely followed that of Germany.
Analysts at the World Gold Council believe that Greece’s possible Eurozone exit prompted the rise in retail investors’ acquisition of gold. The European market outpaced India’s lead position in the purchase of physical gold and coins.
Over the prior 18 months, Russia has continued to buy gold. In fact, Russia’s gold purchases are thought to represent 13 percent of sovereign reserves. Russian government has increased its gold stores by 300 percent in the past ten years.
The head of the Russian central bank announced that it will continue to buy more gold over the next few years. Analysis of the World Gold Council believe that the country views gold as an essential reserve component.
European Central Bank
Individual investors in Europe seem concerned about the European Central Bank’s money policy. The ECB’s announcement that it will begin a €1.1 trillion bond repurchase program in Q1 2016 may have stimulated the purchase of gold.
Gold is often considered as a hedge against inflation and wealth purchasing power. The ECB bond repurchase program is likely to cause the euro currency to decline against other currencies on foreign exchange markets.