Over the past several weeks, there have been two topics on investors’ minds.
One is the US presidential election.
The other is the gold price.
We’ll leave the election chatter to others. (Although we’ll admit that it’s great for entertainment value.)
For us, the action in the gold price is far more important.
The issue is: Where is the gold price heading next? Up or down? It may not seem important, but where the gold price goes next could provide a major clue on the health (or otherwise) of the world’s economy.
We’ll explain what we mean below…
In our view, investors are going through a ‘reset’ moment with gold.
By this we mean that, for the past year or so, the view on gold is that the price has gone up because gold is an alternative to cash.
With bank deposits paying such low interest rates, investors don’t mind that gold doesn’t pay interest, either.
Gold’s lack of yield has long been a major knocking point among mainstream commentators. So, the theory goes, if the US Federal Reserve raises interest rates, investors will start selling gold and will put their money in cash instead.
That’s fine. And it’s possible that will happen. But we’re not so sure it will happen to the extent that many think. Here’s why…
Don’t bet on a gold price collapse
In our experience, most investors don’t buy gold just because interest rates are near zero percent.
Most mainstream investors have no concept of investing in gold. It’s more likely that they’ll continue to see cash in the bank as the safest place for their money, even if it pays no interest.
Our view is that people have bought, and will buy, gold for much deeper reasons. It’s that they have major concerns about the stability and reliability of the entire monetary system.
We find it hard to believe that a measly 0.25% increase in US interest rates will cause anyone to think that the problems of the past eight years are over.
But that’s not all. It’s important to look at the reasons why folks think the US Federal Reserve may raise interest rates.
One major reason is that they believe inflation is starting to rise.
Well, what asset historically performs well during high inflation? That’s right, gold.
That’s what we mean when we talk about a ‘reset’ in investor thinking. The gold price fell heavily in recent weeks, due to the fears of higher interest rates.
But, as it turns out, some of the reasons why rates may rise are situations that are good for gold.
It could explain why, after the recent fall, and despite the odds of a rate rise increasing, the gold price has (so far) held firm around the US$1,250 level.
And it also explains why the mainstream media is finding it hard to interpret the gold price action.
Take these two news headlines from Bloomberg on the same day (Thursday last week):
‘Canada Stocks Rise With Gold as Fed Minutes Hint at Rate Hike’
‘Gold Trades Near Four-Month Low After Fed Meeting Minutes’
These stories appeared within 90 minutes of each other, yet the headlines express precisely the opposite sentiment.
You see, the mainstream doesn’t get gold. They don’t understand why it’s valuable, and why so many see it as a safe asset.
So our advice is to keep a close eye on gold. Regardless of whether interest rates rise in the US, the gold price will give you a clue on how investors truly perceive the strength of the US economy.
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