Friday, 13 April 2018 09:19 AM
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next.
Weakness of the U.S. Dollar
Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices . The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the country’s large budget and trade deficits and a large increase in the money supply.
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years.
Deflation, a period in which prices decrease, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply.
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.
In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012.) In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.
Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world’s largest holders of gold bullion in 2008, only four years after its inception.
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:
- The 1970s was great for gold, but terrible for stocks.
- The 1980s and 1990s were wonderful for stocks, but horrible for gold.
- 2008 saw stocks drop substantially as consumers migrated to gold.
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
The Bottom Line
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.
Read more: 8 Reasons To Own Gold https://www.investopedia.com/articles/basics/08/reasons-to-own-gold.asp#ixzz58EwIV3B1
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It’s the safest & most undervalued asset today
by Adam Taggart
Monday, February 19, 2018, 1:35 PM
Fred Hickey, frequent cited expert on Bloomberg News and Barron’s Roundtable, has been publishing his author extremely well-respected investment newsletter, The High-Tech Strategist, for 31 years. And he is more worried about the state of the financial markets today than he’s ever been.
While his primary focus has been on analyzing Tech stocks, over the years he has expanded into macro trend analysis as the central banks starting increasingly intervening in world markets and distorting the price of money.
He now finds asset prices dangerously overvalued (within Tech and without) and worries — as we do — about the risk of a major market correction and possible currency crises.
Ironically, this lifelong expert in “all things technology” has concluded that gold (the “barbaric relic”) is the sanest asset to put one’s capital in these days — both due to its safety factor and its current level of undervaluation. He expects the precious metals to fare well during the downward market volatility he foresees, and he is now tracking the mining stocks closely as he predicts they will experience dramatic appreciation from here.
What’s happening to gold mining stocks right now is an amazing story. They’re extremely undervalued. Just this year, we’ve seen the price of gold hold up during this market decline, yet the miners have been getting slaughtered.
One of the things we look at is the HUI-to-gold ratio, or the gold miner index to gold. That is down to 0.133. Now, that’s lower than it was at the 20-year bear market bottom in 2000. It was slightly lower than that at the end of 2015, but we’re talking about near record lows here when the price of gold is up. It looks to me that gold is in a bull market. The charts look that way. It looks that we have higher highs and higher lows, and we’ve gone from $1,050 to $1,330. I think once we go over $1365, which is the old high hit in 2016, then more people will come on board and we’re likely to slingshot higher from there. But the miners have gone in the opposite direction.
I think there’s some reasons for that. One of which is that we have a huge short position built up in the GDX ETF. In the technology world, the Facebooks, and Amazons, and Netflixes, and Googles — the FANG stocks — they get propelled higher as the money pours into the ETFs. Well, it works the opposite way in the gold miner area where money has poured out.
In March of 2017, we had 510 million shares outstanding on the GDX. Just a week ago, it was 310 million, or a 40% decline. Now, a lot of that was short interest. We went up to 55 million shorts of a now-310 million share total. 20% of the total shares outstanding in the GDX were short. Now, that’s like Tesla levels — one of the most favorite shorts on Wall Street. And why would that ever be in a market where gold looks to be in a new bull market? Gold certainly is up more than 20%. And the charts all look like it’s in a new bull market. How could anyone put out this kind of short interest?
Well, it’s one of the problems with the central bank is when you make money as cheap as you do, and you can borrow as much money as you want, then you can play games. It becomes a giant casino. And the people who are playing the short game have helped to drive the price of the miners down at a time when people would have thought they would have risen.
We’ve had this turbulence; the miners should have gone up. Gold held its own. It’s up slightly on the year, but the miners are getting killed. The owners can’t get their head wrapped around it, so they get demoralized and then they sell out. I think we saw that, maybe, on Friday (Feb 9). We saw a capitulative moment.
And then what these shorts will do is that then they’ll cover. Now, it’s unfortunate that they get stampeded like this, but it’s the kind of thing you can do when you have the ability to borrow at very low levels and to play games with people. Miners should be going higher. Today, this price of gold is only $30 away from a break-out high yet, the miners continue to go down.
Ultimately, what determines the profitability for miners is the price of gold. Look back at the margins for these miners now, compare them to the bottom. At the end of 2015, they were only making $225 net of all in sustaining costs, so the price of gold versus their all in sustaining costs. And now, it’s double that. It’s $460; yet, the miners haven’t rallied. It’s amazing. This is the same level, almost, that $460 was $490 in 2012 when the GDX was not 21 but 45.
So, we have this huge disconnect between the price of gold and the margins of the miners — which are doing very well because they had to keep their costs low — and the price of the stocks. Now, ultimately, that will get corrected. We saw the huge run in 2015, where gold went up 30% in the beginning of 2016 and the miners went up 180%. And we saw that in 2000, when gold went up quite a bit, and the miners went up 1600%. That’s 17 times the average. We saw that in the 1970s coming out of the bear market there. We saw that on the big net buyers went up at least 10 times, and some of them went up as much as 30 times. So, this happens regularly when the miners get depressed. They get out of whack with the price of gold and margins, and then they slingshot higher. And that’s what I think we’re about to see.
We’re right there. I think there’s going to be enormous amounts of money entering this sector once again, just as we saw in early 2000s, just like we did coming out of 2015, the bottom, just as we did coming out of the 1970s mid-cycle correction. So, I’m pretty excited about it.
by Bloomberg | Jessica Summers | Monday, January 29, 2018
(Bloomberg) — The enthusiasm in the oil markets is breaking records.
Hedge funds reported record wagers on continued price increases for both U.S. and global oil benchmarks, along with gasoline and diesel. Meanwhile, producers are hedging production at record rates as oil experiences its best January since 2006.
“There is a lot of interest in the direction of crude oil,” Rob Thummel, managing director at Tortoise Capital Advisors LLC, which handles $16 billion in energy-related assets, said by telephone. “The long oil trade continues to be the place to be.”
The tailwinds propelling futures to three-year highs increasingly converge: OPEC has shown unprecedented discipline in sticking to output cuts, Russia and Saudi Arabia are doubling down on their commitment to wipe out the global supply glut, U.S. stockpiles are on their longest downhill slide ever, and last week a boost from a weaker dollar was added to the mix.
Another significant sign the oil crash is behind us, is the clear shift in the futures curve. Both in New York and London, the closer the delivery, the higher the price all the way through 2022. That pattern, known as backwardation, is typical of times when demand is rising and supplies are tightening, and it hadn’t been so marked since 2014.
At the World Economic Forum in Davos last week, Marco Dunand, the head of trading house Mercuria Energy Group Holding SA, said the crude market will remain in backwardation throughout this year with prices trading between $60 and $75 a barrel. BBL Commodities LP, one of the world’s largest oil-focused hedge funds, believes Brent crude will climb to $80 in 2018.
Also in Davos, chatter emerged from Organization of Petroleum Exporting Countries oil ministers on the favorable state of supply and demand.
OPEC Secretary-General Mohammad Barkindo said he sees the much-anticipated rebalancing of the market occurring this year, Russia’s Energy Minister Alexander Novak said that goal is almost in hand and Saudi Minister of Energy and Industry Khalid al-Falih said there are no signs of a significant slowdown in oil demand growth.
“We continue to attract people that think the rebalance is going to continue,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone.
A weaker dollar, which has increased the appeal of commodities priced in the currency, has also added to the upward momentum in oil. The Bloomberg Dollar Spot Index has slid 3.5 percent so far this month.
“Selling begets selling and and buying begets buying,” Pavel Molchanov, an energy research analyst at Raymond James in Houston, said by telephone. “There is a momentum trade at work here. Technicals look great and there is positive sentiment.”
Hedge funds raised their West Texas Intermediate net-long position — the difference between bets on a price increase and wagers on a drop — by 2.9 percent to 496,111 futures and options during the week ended Jan. 23, the highest in U.S. Commodity Futures Trading Commission data going back to 2006. Longs advanced by 2.9 percent, while shorts rose 3.6 percent. Another record was the total number of bets on the U.S. benchmark.
The Brent net-long position jumped 2.4 percent to 584,707 contracts, a record-high, according to data from ICE Futures Europe. Longs added 1 percent, also to an all-time high, while shorts retreated 12 percent.
The net-short position of swap dealers, an indication of hedging, increased for a 15th week to a new high, according to the CFTC data released Friday.
In the fuel market, money managers increased their net-long position on benchmark U.S. gasoline by 13 percent to the highest on record, while the net-bullish position on diesel edged up by 3.7 percent, also to a record.
Other factors helping to propel the U.S. benchmark 9.5 percent this month and attract money managers: the surprise of the price rise itself.
“Not only is it moving, but the consensus was not wildly bullish,” upon entering 2018, Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, said by telephone. “Most analysts were neutral to a little bit negative on oil prices for the year.”
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