It’s been tough finding winners in financial markets so far this year. Nearly every asset class is moving together in lockstep … to the downside.
But one asset that’s been much maligned in recent years, practically given up for dead in fact, is glittering again: Gold!
The Dow and S&P 500 are both down 8% year to date.
Small caps have it worse with a double-digit decline of 12.2%.
China’s Shanghai Index plunged 20% in the last three weeks alone.
And most commodities are still getting shellacked with nat gas down 6.7% and Oil plunging 15.1% already this year.
But it looks like gold got its groove back in 2016!
In fact, the yellow metal is up 5.3% in 2016 and investors are responding. Buying of “paper” gold through exchange-traded funds (ETFs) and other exchange-traded products (ETPs) is expanding at the fastest pace in 12 months, with the total value of such gold-backed products jumping by $3 billion so far this year, according to Bloomberg.
After a three-year long bear market that saw gold prices plunge 44%, the precious metal is once again glittering in the eyes of investors worldwide.
Perhaps the appeal of gold as a safe-haven asset has finally returned with volatility on the rise in financial markets worldwide.
Institutions and individuals alike are shifting their asset allocation
toward gold as the ultimate risk-off trade!
Gold futures holdings by hedge funds and money managers swung to a net-long position of 1,934 contracts in the week ended January 19. That’s a huge swing in bullish sentiment compared to a record net-short of 24,263 contracts held at the end of December.
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Retail investors have poured $1 billion into precious metal ETFs including the SPDR Gold Trust ETF (GLD) so far this year, on pace for the biggest monthly inflow in a year.
This is quite a reversal of fortune for the yellow metal, which sank to a five-year low in 2015 thanks mainly to a strong dollar and the U.S. Federal Reserve ending its QE money-printing scheme.
Ah, but central banks the world over are still printing euro and yen, etc. with reckless abandon. Even China is devaluating its currency in this global deflationary environment. The result is that gold has actually been appreciating in many foreign currencies for some time now.
Perhaps investors are rushing to buy before precious metals get any more expensive.
In fact about 90% of physical gold demand comes from outside the U.S., mostly from emerging markets including China and India, according to U.S. Global Investors. In China, a record 2,596 tonnes of gold was withdrawn from the Shanghai Gold Exchange last year alone. That accounts for 80% of total global production in 2015!
The People’s Bank of China now holds more than 1,762 tonnes as of December, according to “official” disclosures, but it could be much more than that. Now China’s stock market is crumbling; leaving domestic investors to search for other safe haven investments.
And currency devaluation means gold is getting more expensive for Chinese — and most other emerging market investors. Gold was up 12% in Russia and surged nearly 20% higher in South Africa last year, in local currency terms. And gold is getting more expensive when priced in Canadian and Australian dollars too, not to mention the euro.
In fact, for U.S. dollar investors, the rise in gold is only just getting underway. Could a late-to-the-party buying stampede be just around the corner?
Plus, gold has the three factors I find most appealing as a contrarian investor:
#1: Gold is almost universally reviled after a three-year bear market …
#2: It’s cheap; although difficult to value in absolute terms, in a deeply indebted world of increasingly unstable economies, gold looks like a bargain at just above $1,000 an ounce …
#3: Gold has just started an uptrend, while most other global assets are plunging in value. But no one seems to notice that gold is glittering again … at least not yet!
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