Gold's Growing Pains: We Hardly Knew Ye


Five years represents a particularly long time for just about everything except for Galapagos tortoises and continental drift.  Five years ago, a devastated US dollar made investors look to commodities as a means of recouping lost value, causing almost every foodstuff or metal or energy listed on the market to surge upwards on the back of poor spending value and fierce Chinese growth.  Fast forward five years and our lives have changed rather significantly: not only have we finally seen the last Harry Potter movie, but just about every investor and their dog are hedging up portfolios with treasuries rather than commodities.  The five-year figure represents a critical nadir for gold in particular, which fell during mid-July trading to a five-year low by sinking below the $1100 per-ounce threshold, indicating an absolute disdain for the precious metal amongst investors.  What makes gold suddenly such a harsh sell and when can investors expect the metal to turn about and generate growth?

All About The Benjamins

If you can get currency for free, why bother substituting currency for something else within your holdings?  This attitude has driven America's recovery since the recession (or the lack thereof, depending on your economic stance) by offering bargain-bin lending rates across the board in order to facilitate more spending and more confidence in an ailing greenback.  The plan has worked all too well: the dollar index enjoyed steady gains from 2010 through 2014 but has positively hit the ground running through 2015, gaining twenty percent growth in the past twelve calendar months.  The Federal Reserve, who dictates the value of the dollars in your pocket like some benevolent financial dictator, will certainly have to raise interest rates in the immediate future in order to counter a prolonged period of flat currency, similar to Japan's ailing yen over the course of the past decade.  Yet the Fed wants the dollar to enjoy being the prettiest girl at the dance for as long as possible, as the Euro faces its toughest challenge while the ruble and yuan positively collapse.  This blasé financial policy has had harsh consequences for gold.  Why, after all, should investors want a hedge against inflation when the Federal Reserve shows absolutely no enthusiasm for inflation? 

Sinking Tides

The numbers speak for the performance of gold through 2015.  The Comex division of the New York Mercantile Exchange traded troy ounces of gold for delivery in August, the most common mechanism for investing in gold commodities, at the bottom-barrel price of $1106 per ounce last week.  That represents the lowest cost for gold futures on delivery since March of 2010.  The news gets worse for precious metals bulls: silver dropped even lower, hitting six-year lows, while platinum dipped below $1000 per ounce for the first time since 2008.  What's powering the downward shift for gold?  While the Greek exit remains a big topic of conversation, the failure of the Greeks to maintain a Eurozone economy actually means good things for gold, since more investors will shuck the Euro in favor of metals as Greek currency woes push portfolios to look for currency hedges.  Rather, the focus on gold stems from domestic disputes, specifically Janet Yellen's policy of fiscal appeasement and her frequency for betraying what must be the absolute worst poker face in the entire world.  As Yellen's public response to interest-rate hikes turns from suggestive to definitive, much as a college student's job search becomes far more series as graduation approaches, gold represents the least welcome asset in a portfolio that will suffer from a market looking for higher-yield assets to compensate for poor overseas purchasing power.

Good Gold News, Of Sorts

Gold investors need not gnash their teeth and throw their holdings out the window.  Gold represents a superior investment through 2015 than many of its competitors, especially as regarding securities.  The gold/silver ratio, for instance, has climbed through almost all of 2015, suggesting that gold (and especially gold ETFs) outperformed silver by a massive margin.  Standing at above 80 after spending most of the past five years below 70, the momentum swing suggests that investors trust gold more than they do silver, though the market results indicate that neither confidence runs deep.  The sharp drop of mid-July indicates that a large fund sold off their gold at the right moment needed to take advantage of low liquidity, triggering a chain of sell-offs that made gold drop by nearly fifty dollars per ounce at its worst point of the trading day.  The good news lies in the quick stabilization of the metal: though gold dipped below $1100 per ounce, it almost immediately shot back up as investors saw a clear option for short-term growth by buying low.  This, as such, raises the question of whether investors see any long-term growth in gold.  Alas, much of the picture looks grim.  Phillip Capital issued a memo to investors declaring there to be "no reason" to get into gold, urging them not to purchase metal due to a lack of recovery during Q3 and beyond.  While this represents a drastic step, since there's ample reason to get into gold including mammoth deals by foreign entities to boost their holdings, it's a guideline for the shorter term since the gold/silver ratio indicates that gold is, if anything, too high despite the ongoing loss of value.  Investors should carefully consider the risk factors and then consider gold in the near future as prices continue to depress.  Short-selling gold, especially for delivery in September and interest rate hikes, allows for investors to reap some gains from all the gold losses, though they will have to put up an unattractive initial margin to find an investor with whom you can tango.  In the meantime, wait weeks or even months to buy gold, since its growing pains have not yet began to fade out.

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