Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Now Is the Time to Face Reality and Invest in Gold

Commodities / Gold and Silver 2017 Jan 07, 2017 - 05:31 PM GMT

By: David_Galland

Commodities

Stephen McBride writes: Since reaching multi-year highs in July, gold has plummeted 17%. Having risen 22% in the first seven months of 2016, many believed the yellow metal had moved too far, too fast.

They were right.

Gold’s fall quickened post-election, caused by an uptick in optimism about America’s future. The economy was seen as ready to “take-off” in 2017 once Trump’s pro-growth policies kicked in. The Fed’s December rate hike just added fuel to the fire.


But I wonder, how solid is the reasoning behind the rose-colored glasses?

Sentimental Rationale

Let’s start with a look at the Fed’s rate hike.

The quarter-point rise was seen as a vote of confidence in the economy from the Fed. Though the increase itself is tiny, it was the Fed’s projection for three more rate hikes in 2017 that moved markets higher.

However, it will be very difficult for the Fed to "go-it alone" on monetary tightening. Although the economic picture in the US is improving, weak global growth looks set to continue. This is likely to weigh down the Fed’s plans for 2017. Divergent monetary policy would create large premia between US yields and those offered by Germany or Japan. This will cause massive inflows into US assets, thus sending the dollar soaring higher.

Higher rates also mean the cost of holding gold is higher as it earns no yield. This is certainly a negative for gold. Long term, though, higher rates could actually be positive for gold.

The yield on the 10-year Treasury has risen 85% from its July lows, and many now believe the 35-year bull market in bonds is over. All signs seem to point in that direction, but there’s a problem.

US government debt is fast approaching $20 trillion, which equals 105% of GDP. Even with record-low interest rates, 6% of 2015’s budget was spent on just interest payments. Given its elevated debt levels, the government can ill-afford to have its budget deficits blown up by rising borrowing costs. If the Government’s fiscal-follies come to the forefront as they did in 2011, the Fed could be forced to reverse course.

This is closely linked to the second reason for optimism—fiscal stimulus.

A Proposal Too Far

If rates continue to rise, it would greatly boost the cost of funding Trump’s proposed $500 billion infrastructure package. Given that markets have already moved based on this, if it failed to happen, it could be very negative. It would also pass the growth-baton back to monetary policy. If we learned anything in 2016, it was that unconventional monetary policy alone cannot spur meaningful growth.

The two other policies to complete Trump’s “growth-trifecta” are tax cuts and scaled-back regulation.

The regulatory cuts shouldn’t be too hard to enact and will be very good for economic activity. However, if higher interest rates cause government deficits to explode, tax cuts would be out of the question.

As you can see, many of the reasons behind the cheery outlook are unsound and may not come to fruition. If they don’t, Trump’s term in office could echo that of the man he had hoped not too—President Obama. Obama enjoyed a honeymoon period based on the “Hope and Change” he promised. When the changes failed to arrive, confidence was lost.

For Trump, a loss of faith in the ability to make good on his promises would have an adverse impact on business and consumer confidence—and the markets.

In light of the reasons behind gold’s fall, is the logic for owning it still valid?

Fundamentally Sound 

In 1912, J.P. Morgan proclaimed, “Money is gold and nothing else.” 104 years on, I would argue the reasons to own gold today are as strong as any time since.

Gold is the only financial asset that is not also someone else’s liability. Quite a good quality to have when total liabilities in the US are more than 3.5 times GDP.

The belief that the Federal government couldn’t fund its then $15 trillion in liabilities helped gold skyrocket in 2011. That concern is even more valid today, yet the gold price has fallen. Over the last five years, gold investors have learned that what is inevitable is not necessarily imminent.

The reasoning behind gold’s latest decline rests on a shaky foundation of assumptions. If things don’t go according to plan, it could create uncertainty, and that will benefit gold.

At $1,140 per ounce, gold has a lot of potential upside. However, given the strong economic position the US enjoys relative to the rest of the world, US assets are also poised to do well in 2017. So, gold should be used as a diversification tool, making up a portion—not all—of your portfolio.

The major lesson of 2016 is that nobody can predict the future.

If anyone could predict where markets would be in even 30 minutes, they would be multi-billionaires. The actionable point from this lesson—you must make your own informed investment decisions. And never "trust in unicorns" as my colleague David Galland has written about.

Free report reveals: How to Eliminate Stock Market Risk with 3 Proven Investment Strategies

If you’re tired of being lied to by all those so-called “investment gurus” promising a sure-fire way to get 1,000% returns... but still need a system to safely get stock market returns…you need a copy of Garret/Galland Research's latest free special report.

Click here to learn more about this proven investing system that will change how you invest forever.

David Galland
Managing Editor, The Passing Parade

http://www.garretgalland.com

Garret/Galland Research provides private investors and financial service professionals with original research on compelling investments uncovered by our team. Sign up for one or both of our free weekly e-letters. The Passing Parade offers fast-paced, entertaining, and always interesting observations on the global economy, markets, and more. Sign up now… it’s free!

© 2016 David Galland - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - 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

6 Critical Money Making Rules