Gold—Even at its Lowest Levels in 2018—is Behaving Just as Prescribed

By: Rachel Koning Beals - News Editor Marketwatch

Gold’s sharp decline over the past month serves as little surprise to the investors who want the asset to perform in just this fashion—that is, as an alternative to assets perceived as risky, like stocks.

They’re betting that the opposite will be true as well, that gold will resume its role as protector and diversifier, even inflation hedge, when what they see as bloated price-to-earnings ratios, heavy debt-to-GDP ratios among major economies and hints of higher inflation finally catch up to the stock market.

“Sure, the opportunity cost of holding gold given where stocks are isn’t great, but the long-term reasons to own gold are just as real as they were months ago, as a store of value with low correlation to stocks,” said Adam Strauss, CFA, with Appleseed Capital.

For now, gold bulls have had to watch with some anxiety as gold prices GCQ8, +0.51% GCZ8, +0.48% plunged last month to their lowest level in nearly a year—notching a settlement as low as $1,224 an ounce at one point, and even grazing a $1,210 low in intraday action, in the futures market. That settlement marked gold’s entry into correction territory, or down more than 10% from its peak on Jan. 15 at $1,362.90. Gold futures have now fallen on a weekly basis for three weeks in a row.

Neither stocks nor gold have strictly followed the presumed rules in recent weeks as the threat of a full-scale trade war took root as the U.S. threatened to enact tariffs against China and the European Union and these trading partners responded in kind. Risk-on markets barely registered alarm; the S&P 500 index SPX, +0.35% has gained 3.6% so far in July. And gold, often serving as even a short-term haven stash when geopolitical and global economic worries flare, was largely ignored for this use; it’s on track to shed 2.5% this month and is down about 6.6% in 2018 to date. True, the stock-gold inverse relationship held, just not as expected.

However, there is another inverse relationship that is played out much as expected and that too restores gold holders’ confidence that the metal’s descent isn’t all that worrying. The trade-war worries elevated the U.S. dollar to haven status among currencies, markedly against China’s yuan CNYUSD, +0.3896% (see the following chart). A stronger dollar can make commodities priced in the currency, such as gold, more expensive to investors using other monetary units, thus cutting demand for gold.

After declining by 9.8% during 2017, for the steepest annual fall since 2001, the ICE dollar index DXY, -0.26% again started the year on the back foot. But since a mid-April nadir, the DXY, as the gauge is sometimes referred, has rallied by about 6%. Gold’s near-term fate may remain tied to the dollar, but there is little shock or surprise in that.

Part of gold’s drop has been because of a tainted association to commodities in general, a relationship that will presumably mean less to investors if and when they’re spooked back toward the shelter of the yellow metal if stocks retreat.

“While gold’s commodity function (jewelry) is not central to our monetary investment thesis, the fact remains that gold is a key component of most commodity indices. In fact, gold is currently the single largest weighting in the Bloomberg Commodity Index, at 9.32%. In the very short run, therefore, gold is not immune to the magnetic pull of displacements in the commodity complex,” said Trey Reik, senior portfolio manager with Sprott Asset Management.

He points to July 11, a particularly sharp daily drop for copper prices and even steeper declines for the Bloomberg Commodity Index since 2014. Base metals broadly fell 3%-plus that day, when gold comparatively fell a little more than 1%, a gap that “serves as a testament to gold’s non-correlating profile,” he said.

“We view gold’s early summer performance as incremental evidence of bullion’s true portfolio utility,” Reik said. “Gold is not a magical elixir, but it is a fiercely reliable store of value.”

Reik is worried about the durability of what he sees as buyback-fueled stock rally of relatively narrow breadth.

“While imbalances and fragilities continue to mount in traditional asset markets, gold’s portfolio insurance value is being priced remarkably cheaply,” said Reik. “This is frequently a signal that market dynamics are about to change.”

Peter Hug, global trading director with Kitco Metals, is watching exchange-traded fund interest, including in the popular gold-tracker SPDR Gold Shares GLD, +0.66%

“Inflow into ETFs have begun to accelerate,” said Hug in a recent commentary. “This is the vehicle used primarily by fund managers, and either they believe gold is cheap at $1,225 or they are becoming increasingly concerned of a ‘tipping’ event on the near-term horizon.”

“Technically, we would like to see gold break above the $1,237 level. We’ll leave a little on the table until we get this confirmation,” he said. Conversely, downside support remains at $1,220, said Hug, and gold remains vulnerable to a test of this marker.

Saxo’s Hansen also has an eye on $1,220, which represents a 50% retracement of the significant $329-per-ounce rally logged between December 2015 and July 2016.

“For this level to hold, however, it is clear that the dollar appreciation needs to pause or reverse, especially against the yuan,” said Hansen.

Appleseed’s Strauss believes stocks and their relative value justify diversification that includes gold. The S&P 500 has an overall P/E ratio, based on the past 12 months, of 24.9, according to S&P Global Inc. The average of the trailing P/E ratio of the index going back to 1960 is 19.2.

And some of the metal’s fate, though not its longer-term durability, resides with the rate-hiking Federal Reserve and Treasury yields TMUBMUSD10Y, +0.35% Higher rates in bonds lure demand away from haven gold, although that is only when higher yields offer enough compensation for inflation.

“The common fix for out-of-control debt/GDP ratios [in major economies] is to ‘inflate’ your way out of it,” Strauss said. “Consider that and the fact that while nominal interest rates are rising, real interest rates, when higher inflation is factored in, are still largely negative. That’s an environment in which gold has historically performed well.”

Trump Trade and Currency Wars With China –  Goldnomics Podcast

News and Commentary

Gold prices crawl up on steady dollar (Reuters.com)

Gold Prices Hover Near 17-month Lows as Dollar Weighs (Investing.com)

US sanctions on Iran to target gold, carpets and more (WebFQ.com)


Credit: Reuters

Gold—even at its lowest levels in 2018—is behaving just as prescribed (MarketWatch.com)

SWOT Analysis: Is The Dollar Near Its Peak? (GoldSeek.com)

The Federal Reserve As An Engine Of Deflation (sic!) (24HGold.com)

Listen on SoundCloud , Blubrry & iTunesWatch on YouTube below


Gold Prices (LBMA AM)

06 Aug: USD 1,212.00, GBP 934.94 & EUR 1,048.26 per ounce
03 Aug: USD 1,207.70, GBP 928.60 & EUR 1,042.97 per ounce
02 Aug: USD 1,217.60, GBP 931.22 & EUR 1,048.23 per ounce
01 Aug: USD 1,222.75, GBP 932.47 & EUR 1,046.55 per ounce
31 Jul: USD 1,219.20, GBP 926.71 & EUR 1,039.86 per ounce
30 Jul: USD 1,222.05, GBP 931.20 & EUR 1,045.95 per ounce
27 Jul: USD 1,219.15, GBP 931.06 & EUR 1,048.10 per ounce

Silver Prices (LBMA)

06 Aug: USD 15.35, GBP 11.86 & EUR 13.30 per ounce
03 Aug: USD 15.36, GBP 11.81 & EUR 13.26 per ounce
02 Aug: USD 15.45, GBP 11.78 & EUR 13.29 per ounce
01 Aug: USD 15.48, GBP 11.79 & EUR 13.24 per ounce
31 Jul: USD 15.43, GBP 11.72 & EUR 13.15 per ounce
30 Jul: USD 15.49, GBP 11.81 & EUR 13.25 per ounce
27 Jul: USD 15.36, GBP 11.72 & EUR 13.20 per ounce


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Comments

DarkPurpleHaze Tue, 08/07/2018 - 11:57 Permalink

What a load of B.S.

Talk about having it both ways or what?

Gold/silver plunge and/or stagnate for years and all the talking metal-heads out there still cling to their completely misguided outlook as somehow being right on target???

Hustlers and con-artists with huckster personslities will say/spin anything to make it seem like they were right or prescient. But it's nothing more than word sophistry and a shell game of mistruthes and storytelling.

 

 

blueseas Tue, 08/07/2018 - 13:59 Permalink

I'M absolutely sure that free market forces have very little effect on the pm prices.  Central banks are primarily driving the price and now it appears to be China. 

captain whitewater Tue, 08/07/2018 - 14:00 Permalink

I keep buying gold coins and silver coins no matter what.  The end of times is here.  

At US Bank these days a withdrawal of $500 cash or a deposit of $500 cash triggers a little note to the IRS.  Money laundering concerns I am told. Ever hear of garage sale shopping for deals where only cash works?  Posting bail for $500 or a $1000 on a petty misdemeanor?  Buying a used car from the newspaper now is a potential money laundering scheme?  How about the gambling aspect?  We are talking Reno, Nevada here comrades. Lot of pawn shops here pay cash for selling them your stuff. Some sellers only accept cash for their stuff.

So when FRN become time stamped at the bank so that they self-destruct after 90 days. Then your cash transactions (in or out) are being monitored by the IRS gold and silver will become more than or less valuable than a barbaric/worthless relic as Uncle Warren calls them? 

Buying silver monster boxes in 2010 and 2011? When the PM market was moving up and sideways then up again should have been dealt with by buying low AND selling high.  You then avoid being caught holding PM for the higher prices.  Hedging is what it is called.  Cost averaging is what others call it.

The People's Republic of California found me with the help of a PI firm to claim a lost $20K cashiers check from the unclaimed property department.  I deposit the check. No IRS issue. I take $500 cash...IRS notification. 

You anti-gold, pro-Fang stock market guys are dopes if you think your IRA money, stocks and your cash savings are not in danger. We are one event away from the mother of all bank runs.  Who owns the certificates on your stocks?  You don't?

Ever hear of Knight Capital?  A transfer agent that nearly cracked in one trading session that would have taken down Scottrade clients with it in 2012.

Believe me now and think about it later.

 

exartizo Tue, 08/07/2018 - 14:51 Permalink

GoldCore you Fucking Idiot:

The equities markets have been arguably "bloated" for years and debt to GDP ratios have been sky high for waaaay longer than that.

Those factors have nothing to do with gold.

Why don't you just face the fact that you are a Clueless Continuous Feckless Cunt Gold Pumper, along with your new buddy Ms. Beals, unless her first name is "Jennifer" in which case I'm sure we can excuse her Idiocy regarding commodities markets in exchange for an encore of her famous Flashdance Water Strip.

Oh wait, cancel that...her name is Rachel and I'm pretty sure that she looks NOTHING like Jennifer.

arrowrod Tue, 08/07/2018 - 17:28 Permalink

I come to ZH for "hot" stock information.  All I read are whining, crying, and shitting in pants.  Nobody touted FB, after it dropped 20%.  Nobody touted Tesla, after the tent story depressed the stock.

Anybody buying Nucor or USS?  Are American car companies a buy, with 3 million new workers?  Noooooo! Just daily whine.  Fuck, let's have a cheese section.  Honest, I'm trying to swear off swearing.  Next time, "expletive, deleted"

tangent Tue, 08/07/2018 - 17:42 Permalink

Stock market valuations are generally unacceptable... there is no metric left that indicates appropriate valuations. Its very hard to win on anything in this environment. One of my only longs is Dash crypto. Not Bitcoin because it has too low of a transaction volume ceiling.

Jungle Jim blueseas Wed, 08/08/2018 - 07:03 Permalink

In 2000 I was buying guns and ammunition and related accessories, books, manuals, etc.. Also non-perishable food, etc..

Gold showed no sign of ever going anywhere then. No sign I could see, anyway. It doesn't look like it's ever going anywhere (but lower down) now.

It's barely clinging to $1200. I suspect it will be closer to $1050 by the year's end. 

I'll soon be 62. So, yeah, seven years is a long time to me. I may not have much more than one year left.

But, no, financial planning is not my forte. I've never owned a stock. I wouldn't know how or where to buy or sell a stock.

If I had just stayed in cash instead of taking a giant gamble on precious metals I'd be a lot better off now.

By the way, before someone starts screaming about "paper gold," all the metal I bought was all physical, all the time. Back when it was in what I see now was a speculative bubble.

In reply to by blueseas

lizzoilz Wed, 08/08/2018 - 02:00 Permalink

ShepWave Pre-Market / Intra Day Update for Wednesday Published

Most of us here at ShepWave have been trading for many years. We know that at key market turns there will be an apparent effort to shake-out weak traders. That is what I believe is happening currently.

The significance of the gap up opens in the SPX and $INDU need to be watched closely. ShepWave Traders for the past 15 years have watched how gap and Island Patterns play out and what to be watching. BE READY.

ALSO

We have received many emails regarding the Major-TIME-CYCLE TURN DATEcoming in the next few weeks.  The support of the May 3rd and June 28th--as well as the many previous Major-TIME-CYCLE TURN dates has played out significantly and is about to be altered; probably drastically.

Again--I suggest thinking back to the night of the November 2016 U.S. presidential election. Late that evening the Futures for the DOW Industrials were about 1,000 points or more BELOW fair value.  That created the pivot area--from which came the support to correlate the  TIME-CYCLE TURN(S) that have lasted since that time.  THIS IS ABOUT TO CHANGE!  IT IS GOING TO CHANGE ABRUPTLY! BE READY!

 Despite the TIME-CYCLE TURN DATES we give--there is no substitution for using the actual trade triggers

Jungle Jim lizzoilz Wed, 08/08/2018 - 07:09 Permalink

My cash is nearly gone. I have nothing coming in. Zero.

I need to move to better living quarters. That will exhaust all or nearly all my remaining cash reserves in a short time.

Then there is nothing left for me to live on but my tiny remaining stack of Au.

So, how soon are we talking about here? Because I need to do something pretty quick.

If gold is going to bust a move upward by the end of the year, I'll hold off on moving and save the gold till it appreciates in value a little. I mean a *significant* move upward, not ten or fifteen bucks.

In reply to by lizzoilz

ZIRPdiggler Wed, 08/08/2018 - 02:11 Permalink

ahhhh more "data" from a gold shill op. I love how these gold newsletter writers try to hook a new batch of fools with their long dissertations, based on carefully cherry-picked stats that support their come-ons about how gold is going to go to $50,000 next month. LMAO. some things will never change.  

ZIRPdiggler Wed, 08/08/2018 - 02:12 Permalink

Gold is not an investment vehicle. it is an insurance policy against government. everyone should have a little just as everyone should have a little homeowners insurance too....it's nothing more, it's nothing less. wake up.

everything1 Wed, 08/08/2018 - 12:37 Permalink

Futures say sideways for years to come.  Gold was $800 10 years ago, silver $10 ten years ago.  Buy, now at your own risk, gold has different value investment purpose in different country, India, cultural, but also inflation hedge, same for China now, it's a replacement for capital flight and hedge against RMB/Yuan devaluations.  Some peoples are more savers, some more spenders, but more and more are getting into investment vehicles seeing gold for what it really is, a hoarded relic, although long time holders of recent have done well, 1200 is nothing to spit at.  Central banks are the new big hoarder/stackers, certainly driving demand and price, some say we are in currency war now, but I see China and Russia also racing as their central bank stacks are similar in size.  This is what happens with price when people chase something.   China central banks will buy on dips, we've seen it before, they will play any market, any country, anything, they are the new capitalists, damn good opportunists, whereas U.S. is well .. lets just say we are socialists to bankers, corporations, lobbyists, insurance companies, and anyone who will pay to play.

Patience.  I only allow myself 1 oz. gold and 100 oz. silver max per year.  These days I'm favoring more purchases of gold although modern silver coins really are so shiny and beautiful I'm favoring numismatics, they are the only items in my collection that have done anything value wise that last 8 years.