The calm before the storm
(Kitco News) - The grind continues as we close the book on another interesting week in the gold market. Although the gold price didn’t do much, there is a sense that something is going to happen soon.
Analysts note that volatility in the gold market is falling as the price continues to narrow in wedge formation; a classic “calm before the storm” is brewing. The only question is whether the price breaks to the upside or the downside?
Despite markets balancing on a knife’s edge, sentiment in the marketplace is still bullish. Many analysts continue to bet on the upside and it’s difficult to disagree with them. A new problem pops up almost every day that makes gold a more attractive as a safe-haven asset.
The current low interest rate environment, coupled with rising inflation risks, means investors have very few options to hedge against risk. The old 60/40 portfolio balance -- where 60% of your investment is in equities and 40% is in bonds -- is useful as a screen door on a submarine. In real terms, which includes inflation, the 10-year bond yield is at -43 basis points.
To put that in the simplest terms, for every dollar you invest in a government bond, you are losing money, assuming no price appreciation. To top it off, because of inflation, the purchasing power of the money you get back has fallen.
This is why there has been a growing chorus of calls for investors to jump into gold and silver. Yes, there are opportunity costs for owning gold, but the precious metal’s price appreciation now outweighs them.
And the consensus among economists and market analysts is that negative to real interest rates are going to be around for a long time. Not only are bond yields falling, but investors are now faced with the risks of a market correction.
In just over a week, the Nasdaq has fallen 10%.
Finally, I just wanted to acknowledge that today is the 19th anniversary of the 9/11 terrorist attacks. The world changed for a lot of people that day and they have been in my thoughts all day.
This anniversary also has new meaning as we all deal with the unrelenting COVID-19 pandemic. The universal truth is that we are all better together than we are apart.