Unpredictable Outcomes: The 2016 Elections and the Price of Gold

The 2016 Presidential Election is looming near, giving rise to many questions about the future of the country. Election years are known to breed unrest and scrutiny of the country’s financial situation, and this tumultuous presidential election is proving to be no different. Investors never enjoy uncertainty, and election times offer more questions than answers, especially with two main candidates that have such differing views. There has previously been a trend showing gold prices that correlated with the election cycle. The 2016 presidential elections, and how they will affect the price of gold, is proving to be even less predictable.

Historically, the price of gold has been seen to drop before an election, and then begin to rise in the following years. This “presidential election cycle theory”, which was explained by Yale Hirsch, a market historian, says that stock market trends can be predicted based on the four-year presidential term[i]. Even more specifically, markets tend to fall the most in the last year of a president’s second term. It is believed that one of the reasons for the trend is related to presidential policy. Unpopular reforms, such as spending cuts, and curbing inflation, are often implemented in the beginning of their term. Approval ratings are still high, and they are not campaigning for their next election. As their second-term election campaign approaches, incumbent presidents try to stimulate the economy and keep the public focused on good economic news to be reelected. This is often why stocks tend to see an above-average increase during the year preceding an election year, as increasing equity prices and a booming economy shed positive light on the incumbent political party. Moreover, as the predictability of government policy rises with time after the elections, investors are more eager to take risk.

Gold average annual return during presidential year
Source: Federal Reserve Bank of St. Louis

In 2004, 2008 and 2012, the 12-month periods leading up to each election have all resulted in a drop in gold prices just prior to the election. In March of 2008, gold reached more than $1,000 an ounce and then dropped to $740 in the election month of November.[ii] In the final year of an election cycle, average market returns were 6.1%, falling to negative territory during a president’s final term[iii].  Overall, only 5 presidents in history have seen equities rise more than 50% during their term. The exclusive club includes recent Democratic leaders, Bill Clinton and Barack Obama. Meanwhile, Herbert Hoover and Richard Nixon saw the biggest drop-offs in presidential history largely due to the Great Depression and Watergate Scandal, respectively.

The price of gold is affected by many factors, not just election cycles. Gold is often viewed as being a hedge against volatile markets, and a good investment during inflation.  There is often an inverse relationship with the U.S. dollar (as the dollar’s value rises, it takes fewer of those dollars to buy the same amount of gold); an inverse relationship with stocks, and an inverse relationship with bond yields.[iv] The strength of the US dollar, in these times of political uncertainty, is coming into question. Another factor that will affect the price of gold is the uncertainty surrounding the raising of interest rates.  While Fed officials insist they are not considering the political consequences of increasing rates, it seems they are hesitant to act before the November election out of concern for the economic consequences of political turbulence. It is quite similar to the way they hesitated before Britain’s referendum in June on its membership in the European Union[v]. Following the referendum, gold jumped from US$1,268.60 an ounce on June 22nd to US$1,374.74 on July 10th. With the growing potential for a December interest-rate hike by the Federal Reserve, institutional investors are backing away from gold in favor of the potentially higher-yielding sovereign bonds.

Dollar vs Gold comparison over the last 10 years
Source: Daily LBMA fix gold price with the daily closing price for the broad trade-weighted U.S. dollar index over the last 10 years.

The election does not represent the sole factor in determining gold prices, but it can definitely play a huge role.  Regardless of which candidate you side with, the election outcome will affect economic outlooks, which will have a direct impact on how the price of gold will fare.

[i]  http://www.nasdaq.com/investing/glossary/p/presidental-election-cycle-theory

[ii] https://www.sec.gov/Archives/edgar/data/756894/000119312512137603/d320681dex991.htm

[iii] http://www.nytimes.com/2016/09/13/business/economy/fed-interest-rates-lael-brainard.html

[iv] http://www.nasdaq.com/article/how-presidential-elections-affect-the-stock-markets-cm586601#ixzz4Ne3dF0d8

[v] http://www.cnbc.com/2016/09/28/whom-is-gold-voting-for-a-market-puzzle.html

Posted in Economy, Gold, Precious Metals |

How to Invest in Gold Like a Pro

gold-like-a-pro_gold-bullionGold investing comes with rewards, but not without the relative risk. If this is the asset you have chosen to actively invest in, knowing the market from the ground up is critical to making sound financial decisions.

Have a Plan

Knowing when and where to enter and exit positions is a powerful skill that can only be honed through consistent planning and preparation. For starters, know what market environment you wish to participate in. Gold prices can move either in a ranging or trending direction. Trend trading is by far the simplest strategy that can produce decent returns, making it a good fit for beginners who wish to test out the waters.

Know What Kind of Gold to Buy

This is probably one of the most common questions aspiring gold investors throw at their financial advisers. However, there is no one-size-fits-all answer when it comes to gold investing. The answer will depend primarily on the goals of the investor. If you are interested in using gold to hedge against financial uncertainty or to take advantage of the rising gold market, gold bullion is probably the best form of gold to invest in.

Determine Capital Exposure

How much of your total capital should you invest in gold? Similar to knowing what kind of gold to buy, the answer to this question is not a constant. The general rule of thumb, however, is to invest anywhere between 10 to 30 percent, depending on how the global economic situation is currently acting.

Seek Long-Term Growth

Patience will play a huge part in an investor’s endgame. Avoid actively trading gold as this will create more short-term losses due to relative short-term price volatility and chip off additional capital from brokerage commissions. Instead, try to visualize the market conditions months or years from now. Does it look healthy, promising, and invest-able or dim and bound to free fall anytime?

Invest in Gold with a Reputable Source

The right source is paramount to successful investing. Your source should be able to provide real-time price feeds of gold and other investment vehicles you are trading, transparency in operations. Dealers add a commission to the price they charge, and that amount can vary. Purchasing directly from a Mint is a great way to procure freshly produced gold bullion and is one of the more legitimate and safe avenues for gold investors.

Learn to Extract Profit

After all, the entire point of investing is to make money. You should schedule dates where you can extract some of the profits from your gold investment. This way, you can protect a portion of your capital investment from volatile price movement.

Investing in gold is a great way to grow your current savings and build a retirement nest. From an investment perspective, gold offers decent returns but still with minimal risk. An investor must be able to manage this omnipresent risk above all else if he/she wishes to profit in the long term.

Posted in Silver |

Silver Market Volatility and When to Buy

silver--and-eolic-turbineSilver has been considered a precious metal throughout human history. It has been mined with zeal since ancient times. No doubt, many people say the silver market is sometimes volatile. They ask when is the right time to buy.

More than 877 million ounces of silver are mined each year. Importantly, new industrial processes continue to consume more of it. Silver analysts, such as those at JP Morgan Chase in New York, believe that demand from solar energy producers and others will drive silver prices much higher over the next decade.

Why Buy Silver Now

JP Morgan Chase’s precious metals “strategy” is based on Modern Portfolio Theory (MPT) asset diversification. Silver is historically inexpensive, supply is low, and silver demand is predicted to increase from today’s levels.

This simple story is compelling for investors in search of value. Long-term gains from financial assets like seek reinvestment, and silver is a prime opportunity for a portion of investors’ funds.

Silver and the Solar Industry

According to BRE’s IHS publisher in the UK, the demand for solar power is predicted to increase 30 percent year-to-year. China, despite fluctuating stock markets and reports of economic slowdown, continues to install solar energy components faster than others but people around the world see the long-term value of solar energy and they prefer it to carbon-based energy generation.

Most PV cells are made with silver paste. The solar industry predicts use of about 70 million ounces of silver, a bit less than 10 percent of the world’s annual production, in 2015 to 2016. PV production used more silver from 2014 to 2015 as appetite for solar increased about 7 percent.

World Silver Survey

The most recent World Silver Survey (Silver Institute and Thomson Reuters) reported that strengthening of the U.S. dollar and a move away from commodities by investors in favor of equity assets would temporarily depress both silver and gold prices. This has already happened.

However, longer-term prospects for both silver and gold should improve when the climate change summit of major countries are expected to reach an agreement at year-end 2015.

Silver Supply

Analysts on Wall Street continue to ask where new sources of silver production will be found. Unlike gold, silver is used by a number of manufacturing processes. Silver mining production grew about five percent in 2014-2015. Both silver and copper production increased as new mining projects in the Latin American countries came online.

New production accounted for slightly more than 30 percent of the total global supply. In 2014, Mexico was the largest silver producer in the world. Peru, Chile, China and Australia are also major producers.

New capital investment in silver mining could cause silver production to flatten or decline as silver use continues to increase at a steady rate. For instance, silver demand reached more than one billion ounces in 2014. This level is the fourth highest demand level since 1989-1990. Silver production actually declined by 4 percent in 2013 as industrial demand steadily increased.

Investor Acquisition

Investor appetite for physical silver coins and bars declined last year after a record 2013. In 2014-2015, the world’s stock markets continued to rise as bond and savings rates remained historically low. Money flowed into what investors considered was a “sure thing.” Fewer people purchased precious metals during the period. Precious metals prices, like all assets, rise and fall with supply and demand.

Silver may never reach gold’s popularity with investors. However, like copper, industrial applications and production statistics are solid predictions of higher prices.

Professional Investors

Elliott Associates, an eight billion dollar hedge fund, invested almost $200 million in private solar assets earlier this year. The investment manager believes that solar power will continue to gain popularity and is recognized as a firm that invests in “paradigm shifts” like solar vs. traditional electricity generation resources. Like other professional investment managers, the firm also recommends asset diversification for client portfolios, including precious
metals positions.

Many investment managers around the world now encourage stock market investors to re-balance portfolios and diversify. Stock market appreciation has caused portfolios to become imbalanced because, at current prices, equities may outweigh the original portfolio’s design. Imbalance can increase investor risk.

The best way to manage risk is to spread capital across asset classes, including gold, silver, and other metals. Investors typically keep some reserve cash position. If prices of any asset class decline from current levels, the investor may choose to purchase more to decrease cost basis.

Reasons to Own Silver

A properly diversified portfolio should include silver. Consider precious metals positions when rebalancing stock and retirement plan portfolios.

Central banks around the world have announced that interest rates will rise in the near future. Rising rates, China’s slowdown, or any number of political and economic woes are not the reasons to own precious metals like silver.

Silver prices are historically inexpensive. When silver starts to rise, it may do so quickly. Accumulating silver makes good sense now.




Posted in Silver |