Complacency in the Markets Affecting Gold

08 Oct
complacent stock market

Complacency in the Markets Affecting Gold

Gold Market Discussion

Complacency in the Markets Affecting Gold Negatively This Week

happy about stock marketThe stock market continues to set new highs this week. As these records rack up, there is right now a great deal of complacency in the markets affecting gold. Gold fell slightly again this week under pressure from new stock market highs and interest rate talk. It closed out the week around $1,275. The VIX is moving lower as equity investors remain bullish for now, but it is important to remain cautious, as this has been known to signal the calm before the storm.

What this means for investors: Demand for gold coins is in a major slump right now, and lower demand means cheaper prices. With such low levels of volatility, it is not surprising investors aren’t buying into the ultimate safe haven in droves. In fact, demand is at the lowest it has been in about a decade according to this graph. What the graph also shows is unsettling – the last time demand was so low was right before the last financial crash in 2008. The markets cannot stay this complacent forever though. If there is still room for the equity markets to maintain these levels in the near term, it is worth considering taking advantage now of the low demand for gold to diversify your portfolio.

Interest Rate Talk and Gold

interest rates and talk of goldLast week, the Federal Reserve and Bank of England started readying the markets for an interest rate hike.  Investors expect a similar policy line from the European Central Bank and Bank of Japan. Gold took a hit from the proposed hike as the dollar strengthened. In the short run, gold will likely continue to come under pressure.

Ultimately though, physical gold and silver stand to gain from this shift in monetary policy. Central banks are behind the curve on raising interest rates, which means the purchasing power of the dollar will fall, and real interest rates will go negative. This was what happened in a similar expansionary phase in the 1970s when inflation nearly spiraled out of control.

What this means for investors: Generally as the dollar strengthens, gold weakens, and as interest rates go up, the dollar should strengthen. This is what we are seeing now, and with prices getting pushed down in the short term, it presents a buying opportunity for when the credit cycle advances and the dollar’s purchasing power declines. It is also interesting to note that gold is still up overall of the year in every major currency.

Central Bank of Russia Doubles Pace of Gold Purchase

Central Bank of Russia
Central Bank of Russia

Russia has more than doubled its rate of gold buying in the past several years. In the second quarter alone, it accounted for almost 40% of all gold purchases by a central bank. These gold reserve holdings are replacing reserves that would otherwise have historically been held in dollars or euros. According to the World Gold Council, Russia is the world’s third biggest producer of gold as well as the largest official buyer.

What this means for investors: Major world powers like Russia and China (the two biggest buyers of gold) are shifting away from the dollar. These global superpowers are looking to establish a more independent geopolitical position from the U.S. and gold is a more stable foundation for wealth than fiat currencies.

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