What are companies doing with their piles of cash?
(Kitco News) - In February, we highlighted a potential new trend emerging in the global economy as companies try to figure out what to do with the piles of cash they are currently sitting on.
It appears that gold is starting to attract the attention of major corporations as they look for ways to preserve their wealth ahead of the looming inflation threat. This week Palantir Technologies Inc announced that it purchased $50.7 million worth of 100-ounce gold bars in August.
According to Kitco News' Anna Golubova, the move into gold was prompted by worries of another black swan event at a time when the company's cash pile is growing from its stock sales.
This is the second major company to view gold as a safe-haven asset. Tesla was the first to make a move in the alternative asset space. At the start of the year, the electric car company said that it bought $1.5 billion worth of Bitcoin. However, the company also said that it sees gold as a currency hedge.
"We may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds, and other assets as specified in the future," Tesla said in a filing with the Securities Exchange Commission.
For many analysts, these types of moves into gold are just the start.
"These moves…are strong testaments to how far down the rabbit hole central banking, this grand experiment, has gone. They speak to the fact that there is a huge concern about the soundness of money, about the sanctity of fiat currency," DiMartino Booth told Michelle Makori, editor-in-chief of Kitco News.
Unfortunately, Palantir's move into the gold market had little impact on prices as gold has been unable to break above resistance at $1,800 an ounce. Some analysts are warning that if gold is unable to push past this level, it could end up retesting last week's lows below $1,700 an ounce.
The reality is that hedge funds are stepping away from gold as it appears that the U.S. central bank is on the cusp of shifting its monetary policy. Expectations are growing that Federal Reserve Chair Jerome Powell will lay out the central bank's plan to reduce its monthly bond purchase program next week.
Even if that isn't the case, Kevin Flanagan, head of fixed income strategy at WisdomTree, said tapering is coming, and bond yields are expected to increase. This is not a good environment for gold.
Although gold is expected to struggle in the near term, many analysts note that its long-term fundamentals are still bullish. Although the Federal Reserve is looking to tighten its monetary policy, many economists see a limit to how high rates will eventually go.
While the market faces a turning point, the reality is that real interest rates will remain in negative territory for the foreseeable future. Analysts at Metals Focus recently said in a report that they still see a path for the precious metal to rise back to $1,900 an ounce.