Sometimes, however, gold can actually become a pretty good investment — and this is one of the moments when the “barbaric relic” is looking very attractive. The reason behind the rally is really no mystery. It can be summed up in one word: rates. Or rather absence of them.
Consider the following facts. The U.K., which sports some of the biggest sovereign and commercial debt in the OECD universe, has just voted itself out of the club of Europe.
As a result of those actions, it saw business confidence plunge to a 41-month low, but its 10-year bonds are trading at a record low of 70 basis points. That means that amid all the tumult and turbulence of Brexit, investors are perfectly content to loan money to the U.K. government at a whopping 7/10th of 1% for 10 years forward.
And, of course, the U.K. is not an isolated case. More than $8 trillion of sovereign debt is now trading at negative rates. There is simply no way for investors to earn ANY money in quality yield-based investments anymore.
|The lack of yield elsewhere helps make gold glitter as an investment.|
This is the reason that dividend-based stocks and dowdy utilities are sporting valuations more appropriate for Silicon Valley unicorns. And, of course, it’s also the reason that gold continues to climb without any pause. As long as paper provides no return, it offers no competition to gold and the yellow metal will continue to move higher, squeezing more and more shorts along the way.
Last night, the Bank of Japan offered a new stimulus program that added 28 trillion yen to its balance sheet, agreeing to buy more ETFs. The currency market in response sold USD/JPY because it wanted “more stimulus.”
At this point, anything short of “helicopter money” will not satisfy traders. It seems utterly bizarre that markets are acting this way, essentially daring the central banks to print money ad infinitum, but it’s the result the deflationary times we live in.
|“Anything short of ‘helicopter money’ will not satisfy traders.”|
The Fed, for its part, remains highly reluctant to rock the boat. U.S. data has surprised to the upside for more than a month, but the Fed statement this week offered no timetable for rate hikes. Fed Chief Janet Yellen and company acknowledged the good news, and them promptly went on to ignore it in their policy considerations.
Even if U.S. growth were to soar to 3% this quarter, the Fed will likely hold off on hiking rates until December at the earliest. Although monetary officials pride themselves on being non-political, the current election cycle is the most partisan event in our lifetime and there is no way that monetary authorities will want to get in the crossfire between Donald Trump and Hillary Clinton.
Therefore, as long as rates refuse to rise, gold will continue to attract money, and the precious metal could reach $1,400 an ounce by year’s end.
As mentioned above, the yen jumped and Japanese government bond yields experienced their biggest rally in eight years after the Bank of Japan’s move Friday to boost growth and inflation disappointed investors. Domestic stocks were calmer, in part because the Bank of Japan increased the purchases of exchange-traded funds.
“The BOJ offered markets a little appetizer, but the full menu of easing has been kept in the oven for another day. For now, investors will have to content themselves with the bare minimum,” HSBC wrote in a note.
Google this: Alphabet Inc. (GOOGL), the parent company of Google, reported that second-quarter profit surged 24%, becoming the second big internet player in two days to report strong earnings due to a rise in consumer use of mobile devices. It said revenue grew 21.3% to $21.5 billion, while earnings surged to $4.88 billion from $3.93 billion in the year-ago period.
Google has built a strong mobile presence with its Android smartphone operating system as it looks to move away from its reliance on desktop search traffic to drive profits. According to a Reuters report, advertisers traditionally have paid less for user clicks on mobile ads than on desktop ads, but the solid earnings indicate that is beginning to change. Facebook, its main competitor in mobile advertising, posted a 63% rise in total advertising revenue this week.
Ireland, like many other countries, suffered a banking meltdown in 2008. Now, some of its bankers are being jailed after being convicted of wrongdoing. Two former executives of the Anglo Irish Bank were jailed in Dublin after being convicted of conspiracy to defraud. Authorities said the execs misled depositors, lenders and investors by making the bank’s corporate deposits look larger than they were, the BBC reports.
One exec was sentenced to three and a half years, while the other got two years. A former exec of Irish Life and Permanent was sentenced as a co-conspirator to two years and nine months.
Any views on gold? Central Banks’ maneuvering? How about former bankers’ responsibilities for the banking crisis of recent years. Comment below.
The Money and Markets team