The Gold Price Passes an Important Threshold
The gold price reached $1,243 per ounce on October 23. It broke through a psychological threshold, breaking past $1,220 per ounce, but failed to maintain the momentum.
In the stock market, many stocks—both solid ones like Boeing Co (NYSE:BA) and volatile ones like Tesla Inc (NASDAQ:TSLA)—have recovered after crashing.
Simply put, investors have not given up their gluttonous addiction to equities, choosing higher risk instead of safe havens like gold.
It might be fair to say that gold has lost the shine it once enjoyed as a safe haven. But that’s only because investors appear unaware that markets can crash.
The 10-Year Bull Run Under Pressure
After an almost 10-year bull run on Wall Street, there’s a collective amnesia about stocks’ flip side: they can crash as well as go up. And the pain of enduring a loss on the stock market is far more intense than the pleasure of seeing stocks move higher.
But there’s fashion and there’s style; they’re not the same thing. Fashion is temporary and changes. Style is permanent but adapts.
Investing in stocks, outside of a clear buy-and-hold strategy, is often a fashion.
Gold may be traditional now, but it’s never out of style. And it may soon become fashionable again.
Indeed, the change, or the shift, has already begun.
The fact that gold started to move higher just when stocks started to drop as fears and volatility increased in the stock market demonstrated that the “flight to safety” mechanism remains as relevant as ever.
The gold price trend over the last year shows that investors did not rush to gold during the summer of 2018, a time that was marked by emerging market concerns.
Nor have investors chosen to invest in gold as Wall Street hinted in the last weeks of October that a market sell-off was coming.
Not long ago, this would have happened. However, investors, market analysts, and brokers are operating with a different mindset.
A Different Approach to Investing?
Many have no idea about what it’s like to manage a portfolio during the duress of a crash. Many more have no idea that stock markets go down and that interest rates affect risk appetite.
This, perhaps, best explains why the gold price has experienced such an inconsistent reaction. In other words, there has simply been a collapse in investor sentiment for precious metals and other safe-haven investments.
After all, there has been no shortage of market jitters in 2018. And every time, the market survives.
Stocks, even the most overvalued ones, seem to bounce back on the slightest and weakest of reasons. And that reinforces the idea that stocks have become invincible.
Therefore, almost nobody cares about, or is seeking, a safe-haven investment like gold. That makes gold trade in a limbo-like situation.
Yet, that’s why it may be the right time to consider gold.
It’s the Right Time to Consider Gold
Investors are unaware of the risks and want to continue enjoying the party. They remind me of Noah’s critics as he was building the Ark, or the story of the Three Little Pigs.
Simply put, the majority are always smug when it comes to risk. Until, of course, unexpected and undesirable events occur.
And market sentiment could soon change for the worse.
Already, gold has proven that it’s capable of pulling off short but sharp rallies. That should already be enough cause to temper the pessimism around this most ancient of investments.
Gold has already shown it can gain $20.00 an ounce quickly, when stocks become so volatile as to frighten the most optimistic (or perhaps, most foolish) equity investors.
The gold price could, therefore, rise back to $1,240 and push toward $1,300 before the end of 2018. It took just one week in October to see gold shift from $1,190 to $1,243.
The Only Certainty: Interest Rates Are Going Up
The rise in interest rates is coming. And while many like to say that higher rates bring a higher dollar, there’s no reason to trust the fact that a high dollar cannot coexist with a rising gold price.
Indeed, there appears to be an unjustified certainty that inflation will go up: that is, inflation from higher salaries.
Rather, the chances are much higher for inflation to slow down in 2019. That’s because whatever favorable effects the December 2017 Trump tax cuts had will have run their course.
Higher prices for many goods, due to the trade tariffs on China, could dampen the Christmas season spirits. Consumer sales could drop and job numbers could stop rising.
Moreover, rather than increase oil prices, Saudi Arabia has chosen to handle the Jamal Khashoggi murder mess by increasing oil production.
In other words, oil prices, which appeared to be heading to figures not seen since 2008, may drop after all.
The Dollar’s Rise Will Also Stop
The U.S. dollar will also stop its fast climb against other top currencies because the European Central Bank plans to adjust its own interest rates as it moves away from the quantitative easing policies that were needed to allow the eurozone economies to improve.
These are all factors that will persuade investors to alter their sentiment vis-à-vis gold.
The stock market will soon start betraying the many underlying risks that have not gotten enough attention. These include the already-mentioned trade wars and the U.K.’s troubled process to leave the European Union (Brexit).
Taken alone, each one of these factors has the potential to trigger an increase in the gold price. Taken together, these factors have the potential of triggering a gold rush.