Best of the Week
Most Popular
1.Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - Harry_Dent
2. Is This How World War III Begins, In Almost Complete Silence? - Jeff_Berwick
3.Trump Wins 2nd Presidential Debate, Betfair Betting Markets Odds Bounce - Nadeem_Walayat
4.Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - GoldCore
5.End of SPX Stock Market Correction Nears - Tony_Caldaro
6.Get Ready for the Future - Exponential Machine Intelligence Mega-trend towards Singularity - Nadeem_Walayat
7.US Housing Market Bubble II – It’s Happening Again! - Andy_Sutton
8.FTSE BrExit Stock Market Panic Crash Resolves towards New All Time Highs - Nadeem_Walayat
9.Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - Nadeem_Walayat
10.Gold’s, Miners’ Stops Run - Zeal_LLC
Last 7 days
4 Incredible Market Forecasts You Have to See to Believe - 26th Oct 16
Silver Prices in an Exponential Financial System - 26th Oct 16
Rigged Election: Hillary and Trump Caught Partying Like BFF’s With Kissinger at Jesuit Gala - 26th Oct 16
The Current Message of Yield Curves: Inflation or Deflation? - 25th Oct 16
Broken Central Banks: 4 Quick Pix - 25th Oct 16
Government Stimulus is an Oxymoron, Debt to GDP - 25th Oct 16
Where Will Crude Oil Price Head Next? - 25th Oct 16
Diamonds in the Gold and Silver Mining Stocks - 25th Oct 16
Trump’s Gettysburg Address against the New World - 25th Oct 16
This Past Week in Gold - 24th Oct 16
Can Gold Continue To Rise, Since The Usd Is Moving Higher Too? - 24th Oct 16
Why are Americans Avoiding the Stock Markets; Fear or Lack of Money? - 24th Oct 16
The US Is NOT a Low-Tax Jurisdiction - 24th Oct 16
Stocks, Crude Oil and EURUSD Trend Forecasts - 24th Oct 16
Stock Market Another Month to Go? - 24th Oct 16
Large Sell-off in Stock Market Looming - 24th Oct 16
Ungovernability - 24th Oct 16
Stock Market Boredom Before The Storm - 24th Oct 16
Establishment Mainstream Media Elite Buys US Election for Hillary Clinton, Time Running Out for Trump - 23rd Oct 16
Inflation About To Explode Higher - 22nd Oct 16
Still waiting for SPX uptrend to kick off - 22nd Oct 16
Will a Rising US Dollar Crush Gold’s Fledgling Bull? - 22nd Oct 16
Why The Global Economy Will Disintegrate Rapidly Back to Olduvai Gorge - 22nd Oct 16
GLD Bleeds Out; Weekly Gold Update - 22nd Oct 16
Stock Market Investment Success Through the “Investment Rule of 72” - 21st Oct 16
The Final Bottom in Gold - WHEN - 21st Oct 16
Gold Green Lights Upleg - 21st Oct 16
Demand for US Mints Silver Eagles has ‘Returned with a Vengeance’ - 21st Oct 16
Central Bankers Can't Stop The Death Blow Of The Post US Election Recession - 21st Oct 16
The Fortune at the Bottom of the Pyramid: Golden Opportunity for Frontier Asia - 21st Oct 16
Have You Taken These 4 Simple Steps to Improve Your Trading? - 21st Oct 16
The Stock Market is an Accident Waiting to Happen - 20th Oct 16
It's Rally Time for Gold and Silver Equities - 20th Oct 16
Cashless Society – Risks Posed By The War On Cash - 20th Oct 16
China's insane Housing Market Will Tumble and Crash in 2017 - 20th Oct 16
Donald Trump Bounces Going into 3rd and Final US Presidential Election Debate - 20th Oct 16
Attention Please: Phase Two of the Gold and Silver Train Now leaving the Station. All Aboard? - 19th Oct 16
How to Successfully Trade a Stock Market Crash - Black Monday October 19th 1987 - 19th Oct 16
Tesla, Apple and Uber Push Lithium Prices Even Higher - 18th Oct 16
Silver, Debt, and Deficits – From an Election Year Perspective - 18th Oct 16
UK Property Market: Slow Growth Does Not Equate To Decline - 18th Oct 16
Trump Election Victory is in Your Power - 18th Oct 16
Stock Market More to Come! - 18th Oct 16
This Past Week in Gold and Silver - 17th Oct 16
A Falling Stock Market Cannot Be Allowed - Financial Repression Is Now “In-Play”! - 17th Oct 16
Commodities, Forex and Stock Market Trend Forecasts - 17th Oct 16
Stock Market Crash..or No Crash? - 17th Oct 16
A perspective on risk rally – Risks abound but Stock Market is Confident - 17th Oct 16
Bank of England Blames Brexit for Sterling Drop Inflation, Masks QE Money Printing Cause - 17th Oct 16
From Piety to Pride to Pity, America's Racial Divide - 17th Oct 16

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

The Power of the Wave Principle

Gold - Stay the Course As Mixed Signals Move Markets

Commodities / Gold and Silver 2013 Jul 02, 2013 - 04:59 AM GMT

By: Frank_Holmes


Traders stampeded out of gold, emerging markets and bonds this month, setting record monthly outflows in June. Ever since the Federal Reserve hinted in May that signs of a stronger economy could allow for a slowdown of stimulus, markets have protested the news.

Gold has been hit hard by the tapering talk and resultant rising interest rates and liquidity drain, falling below $1,200 last week for the first time since August 2010. We're also seeing India, the world's biggest gold buyer, trying to stifle gold demand. As the government seeks to reduce its record current account deficit, it has hiked import tariffs on gold to 8 percent and introduced new constraints on rural lending against gold jewelry and coins. Ross Norman, CEO of bullion broker Sharps Pixley, said, "It's almost as if the finance ministry is waging war on the gold sector, which would suggest that they feel they have lost control of the economy to some extent. In that environment, you would want to own gold more than ever."

Other factors fueling the liquidation were the raising of margin requirements on gold by the CME Group, the largest operator of futures exchanges in the U.S., and global liquidity concerns in the U.S. and China. When the country with the largest GDP in the world and the country with the largest population on earth have liquidity concerns, traders run from stocks, bonds and gold and head to cash. Even though gold traders have pulled out of their financial investments, there has been a surge in physical gold buying and central bankers have maintained their positions.

We maintain that gold is in extremely oversold territory and mathematically due for a reversal toward the mean. Yet when gold prices plummet, fear takes over and some investors forget the fundamental reasons to own gold: Gold is a portfolio diversifier and a store of value. It is a finite resource with increasing global demand. I co-authored a book on gold five years ago based on a lifetime of experience with the metal. My advice hasn't changed since then. When it comes to gold, moderation is key. Don't try to get rich with gold because the corresponding risk is simply too high. Limit your exposure to gold as an asset class to 10 percent of your portfolio -- no more than 5 percent in bullion and 5 percent in equities. Rebalance each year to keep that level of exposure and use volatility to your advantage.

Year-Over-Year Percent Change Oscillator: Gold Bullion

There seems to be an inherent emotional bias against gold by many in the financial media and among money managers, especially after gold corrects. Billions of dollars lost in gold make for sensational headlines, yet two darling technology stocks have also taken it on the chin. I find it interesting that the naysayers aren't talking about the fact that Facebook and Apple have caused more destruction in market capitalization over the past year than the biggest gold ETF. The chart below puts the magnitude of decline in context.

FaceBook and Apple lost more in market capitalization then GLD over the last year

Why is it that gold still struggles for acceptance as a permanent asset class? I, too, enjoy catching up with Facebook friends on my iPad, but I have more faith that millions of people in Asia and the Middle East will continue to adore the precious metal long after the novelty of Facebook and iPads wears off.

In many parts of the world, this deep cultural affinity for gold is expressed through the giving of gold coins and jewelry for momentous occasions. Gold will soon be entering its historical period of seasonal strength with Ramadan beginning in July, followed by the Indian Festival of Lights, wedding season and Christmas. We have often published on the impact of this powerful seasonal pattern.

Gold: 24-Hour Composite

In addition to spooking the gold market, the likelihood of the Fed ending its easing also had investors fleeing fixed income investments. Rising interest rates and falling prices led to June bond fund outflows shattering the previous record set in October 2008. Yet downward revisions of economic data suggested that while the economy may be steadily improving, there aren't yet signs of spectacular growth. In response, bond yields retreated by the end of last week. We see the exodus as an entry point for investors who may have been nervous about getting into the bond market.

Fed fears reached far and wide as emerging market equities also experienced record outflows this month as the sell-off extended to Latin America, Europe and Asia. Renewed worries over Chinese growth and concerns with tightening financial conditions accelerated the flight from emerging markets. Money that had been made in recently hot markets was pulled out, further drying up liquidity. We continue to see opportunity in emerging markets, where we seek out undervalued dividend-paying companies with growth prospects.

From time to time, in bull markets and bear markets, prices and fundamentals disconnect. Prices can swing too far on fear and rise too fast on greed. We believe fundamentals remain solid and much of the short-term swings are much ado about nothing. In volatile markets, it is important to trust your investment processes and asset allocation disciplines.

Are you interested in receiving more opinions on gold, natural resources and emerging markets? Sign up to receive email updates from Frank Holmes and the rest of the U.S. Global Investors team, follow us on Twitter or like us on Facebook.

By Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

Frank Holmes Archive

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife