Mar. 16, 2015 10:54 AM ET
Summary
- Gold has come down with U.S. stocks and bonds as the dollar has strengthened on the prospect of U.S. Fed tightening as the ECB loosens monetary policy.
- However, gold has a trump card versus the dollar, its safe haven appeal.
- If capital flight occurs from other investment sectors, demand for gold should increase.
1-Year Chart of Dollar Index at Bloomberg
The chart here shows the appreciation of the dollar index over the past year. The dollar index compares the value of the U.S. dollar to a group of major currencies, including the euro and yen.
During the course of the past year, the U.S. Federal Reserve has concluded its quantitative easing program and is preparing to begin raising the Fed Funds Rate from about zero. Meanwhile, Japan just exited recession and its central bank (BOJ) is easing monetary policy.
The European Central Bank (ECB) has lowered its interest rates substantially and is now employing "non-standard" measures, which is another way of saying quantitative easing. So as the US Fed and ECB and BOJ move in opposite directions, the dollar has strengthened against the currencies of those respective regions.
1-Year Chart of Gold at Kitco.com
Gold has been under pressure over the past year and since the Fed made it clear it would be changing paths toward eventual tightening. Last year, the ECB did a lot of talking about the lengths it would be willing to go to support the eurozone economy. It has been a force against gold, but at the start of this year gold seemingly stabilized.
2-Month Chart of Gold at Kitco.com
However, more recently, as the ECB has followed through with its quantitative easing plans and as the Fed continues to progress toward its first rate hike, gold has again come under pressure. The SPDR Gold Trust (NYSE: GLD) is down 6% just over the past month or so, and the entire gold complex of securities is lower. Gold miners' shares are down even more than the GLD due to their operating leverage to the price of gold. Silver is down as well. You can see that in the table here.
| Precious Metals Securities | 1 Month Change |
| SPDR Gold Trust | -6.0% |
| iShares Silver Trust (NYSE: SLV) | -16.5% |
| Market Vectors Gold Miners (NYSE: GDX) | -15% |
| Market Vectors Junior Gold Miners (NYSE: GDXJ) | -17% |
| Direxion Daily Gold Miners Bull 3X (NYSE: NUGT) | -41% |
| Sprott Physical Gold Trust (NYSE: PHYS) | -6.0% |
| Goldcorp (NYSE: GG) | -20% |
This week offers a special threat to the precious metals complex because the Federal Open Market Committee (FOMC) will issue monetary policy. Many expect the FOMC will remove cautionary language on Wednesday, which could exacerbate market concern about the potential for a near-term rate increase. While I believe a near-term rate hike is unlikely, gold should still be threatened by this prospect and concern.
Still, gold holds a trump card against dollar strength. Gold has safe haven appeal. The actions of the Fed have stirred up the entire market, and stocks have been extremely volatile over the last couple weeks in anticipation of Fed action. The reason for stock market upheaval is due to the impact of higher interest rates on the cost of capital for corporations. It raises the bar for economic value creation, which in turn impedes market value creation. For this reason, and the fact that stocks are overdue for a correction, I believe a 10% correction is likely for stocks now.
Bonds also come under pressure if interest rates are on the rise, and investors should be well-aware of the damage done to the oil complex, partly due to the strong dollar and also on the supply glut.
But if investors are selling stocks, bonds and other commodities, where will their capital run to?
It cannot all go into bets on currency; the dollar run looks extended to me anyway, and currency investment is not something a good many investors are comfortable with. Typically, when stock investors head to the exits, they buy U.S. treasuries, but the prices of treasuries should be pressured by higher interest rates as well.
For this reason, if rate hike fear hits the fan, I expect some investors may funnel capital to gold for safe keeping. Gold has historically been a safe haven destination in flights to safety. It is true that on this occasion, a strengthening dollar should make gold cost cheaper in dollar terms, but if demand for gold increases at the same time due to capital flight from other investment sectors, then the price of gold will be bid up at the same time.
This aspect of the gold investment should at least serve as an offset to dollar strength, where many other securities have no such luck. So gold may hold a trump card against dollar strengthening that could limit its downside should the Fed, the dollar and investor panic cause a market correction. I cover gold regularly, so investors may find value in my column.
0 comments:
Publicar un comentario