Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations

Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations by Claudio Grass

A Strong First Half of the Year, Followed by Another Retreat

In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then.

 

chart-1-gold-annotatedInitially, gold rallied sharply in 2016, but then retreated again in the second half as concerns over Fed rate hikes and the impact of Mr. Trump’s election victory have pushed bond yields and the US dollar up in the short term.

 

 Trusting the Establishment a Bit Too Much?

Investors cannot be blamed for their skittishness, considering the misleading information released by officials. Fed chair Janet Yellen stated at the Jackson Hole meeting of central bankers that the case for rate hikes had “strengthened”, yet she gave markets little guidance on timing, saying that rate hikes would be “gradual” and happen “over time”.

This probably discouraged investors from buying gold, because they still trust the establishment and consider the Fed to have credibility. A rate hike offers investors an alternative to owning gold, as gold doesn’t pay interest. Higher interest rates also tend to dampen price inflation – which is held to be negative for the gold price as well.

But surprise, surprise! The Fed then decided the time was not yet right for a rate hike after all. The initial market reaction seemed to indicate that demand for bullion was about to revive: the gold started to rise again after the Fed’s decision to refrain from a rate hike, the dollar weakened and further monetary stimulus was implemented in Europe and Japan.

However, these are all market considerations involving short term trading tactics. This is indeed a valid and effective approach, but gold is far more than just a short term trading vehicle. We encourage investors to consider the bigger picture and to ponder gold’s long-term appeal, instead of merely focusing on short-term gyrations in reaction to the Fed’s interest rate decisions.

yellen_duct_tape_7-16-2014_largeThere is still a lot of faith in the omnipotence of our vaunted central planners – it won’t last.

Cartoon by Bob Rich

 

A System in Danger of Failing

We and many others have repeatedly warned our readers of the potential failure of the system due to the damage inflicted by the extreme expansionary monetary policies central banks have adopted. The additional money that is constantly pumped into the economy and markets ultimately poses a grave danger to systemic stability.

Central banks are now essentially in a lose-lose situation: prolonging the current low/negative interest rate environment will only expand credit and asset bubbles further and ultimately have a disastrous impact on the economy. On the other hand, raising rates will undoubtedly precipitate a severe recession as well.

They will surely try their best to avoid this, but it is an inevitable outcome. As the Austrian School of Economics warns, the longer one waits with abandoning a credit expansion, the worse the eventual fallout will be. The economy already seems to be dying a slow death. The Fed’s recent decision to once again postpone its long planned rate hike certainly shows that the central planners have similar concerns.

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