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Volatility in Gold Prices: An Educational Series

After a 12-year run, some question whether gold has lost its luster (if you’ll pardon the pun) as an effective portfolio hedge following three years of consistent declines. Many have called into question gold’s investment appeal: either the decade’s long bull run in gold has reached its conclusion, or the last three years’ price declines have generated an unprecedented opportunity to rebuild a portfolio with a base in precious metals. But these conclusions are often the results of emotional decision making. Sprott Senior Portfolio Manager Trey Reik has removed the emotion, examining a host of technical indicators in his latest report.  Trey’s report is a thorough one, and there have been several requests for the “spark notes” version.  There’s a lot to digest, so we’ve put together a 6-part series to help break down some of Trey’s major themes.

The results of his research are surprising.

Trey’s report examines currency fluctuations, national debt levels, demand for U.S. Treasuries, recessionary threats, the seizing up of the credit markets, high valuations of the U.S. equities markets, and CFTC trading trends to paint a comprehensive picture of the current investing environment. While no single factor may draw investors back to gold this year, taken as a whole, Trey anticipates a confluence of technical events may be prompting price volatility, and potentially a recovery. View his full report here. Sprott Institutional Strategy Report - Gold

Gold is not the only asset class which could be more volatile in 2016. Recent headlines continue to be dominated by falling oil prices, the Fed’s interest rate policy, Trump’s hair, and Hillary’s emails. Many asset classes were duly ignored, leading to sleepy performance late last year: the S&P 500 Index declined 1.75%, the DXY dollar index declined 1.54%, the 10-year Treasury yields rose 6 basis points to 2.27%, the so-called-fear gauge, the Vix, largely remained below 20, and gold stayed flat.

But this could be changing.

Taken together, Trey concludes that effective beat-down of gold prices over the last three years have created not only a price floor, but also series of potential catalysts for greater demand. And while we cannot say gold is set for another 12 years of gains, we do see price volatility on the horizon.

Trey reminds us of three key reasons why gold remains relevant as a productive portfolio tool.

  1. Rebalancing the U.S. Financial System. After years of intervention, the Fed is trying to normalize U.S. financial markets, but this is not an easy path, particularly as global economies become increasingly intertwined. Many question the durability of the current state of the U.S. markets, as they appear unable to support a higher federal funds rate or a more productive 10-Year Treasury yield. The Fed is seemingly unable or unwilling to extricate itself from the financial markets, and gold remains one of few internationally-recognized stores of value.

  2. Recessionary Fears. The developed world is grappling with high debt balances accrued in an attempt to mitigate the impacts of the global financial crisis (GFC). While debt has been carried relatively well during periods of economic improvement, a market correction could be in the offing, and gold is often considered a flight to safety in down environments.

  3. U.S. Dollar. Currently, market sentiment for the U.S. dollar is nearly unanimously bullish, but for many investors, the trade has been played through. The result is that others are looking elsewhere for further gains, and the Japanese Yen, the Euro, and the Pound have all been dragged upward by the spillover demand. But these currencies are still subject to high national debt levels and recessionary threats, so where else can investors seeking capital preservation flock? We believe gold is one such asset.

     

We hope you enjoy this series of educational posts which seek to explain the various technical indicators and their potential consequences on precious metal prices.  Feel free to contact us to learn more - we would be happy to explain the central themes in greater detail.



 

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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