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How to Use Gold in Your Portfolio During Bear Markets

Release Date:  Friday, February 8, 2019

DEAL OF THE WEEK:

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Gold and Silver Prices

Gold closed higher on Friday due to concerns over economic growth in Europe and weakness in global stocks but it had its first weekly loss in three because of a higher dollar.  

"The yellow metal saw some so-called short covering to end the week, finding support from the threat of another U.S. government shutdown, with temporary funding expiring on Feb. 15, and intensifying concerns surrounding Brexit, said George Gero, managing director at RBC Wealth Management. "Buyers in Europe for gold may also meet buyers of gold in China after Lunar New Year." Financial markets in China remained closed for the holiday and will reopen Monday.

"Gold bulls said growing concerns about global growth should provide underlying support. The European Central Bank last month took a more dovish-than-expected stance amid continued weakness in European data, while the Federal Reserve last week surprised investors with a dovish pivot, putting future rate moves on hold until further notice. The Reserve Bank of Australia has also struck a dovish tone and the Bank of England on Thursday offered a downbeat outlook for growth amid Brexit uncertainty.

"'The fact that we are seeing major central banks turn dovish at the same time is probably alarming for some investors, which may explain why stocks have failed to sustain their rally. But this is good news for bonds and therefore noninterest-bearing and low-yielding assets such as gold and silver,' said Fawad Razaqzada, market analyst at Forex.com, in a note." ("Gold prices settle higher and pare weekly losses as global stocks slump," Myra P. Saefong, Market Watch, 02/08/19.)

Gold ended the week down $3.10, closing at $1,314.00. Silver ended the week down $0.06, closing at $15.81.

How to Use Gold in Your Portfolio During Bear Markets - Carlsson

Gold is a hedge and a safe haven asset during geopolitical worries, market volatility and uncertainty of the direction of the U.S. dollar.

"GOLD IS REGAINING ITS sparkle in an uncertain market with renewed attention to this ancient asset as a portfolio diversifier.

"The yellow metal is often seen as a safe-haven asset much like U.S. Treasury bonds or cash, an investment that retains value when riskier assets fall.

"Along with stock market uncertainty, several factors currently drive the gold market price, including the direction of the U.S. dollar and concerns of an economic slowdown. Geopolitical worries in the U.S. and the Europe, such as the recent government shutdown, and failed Brexit talks in the U.K., make gold shine as a safe haven.

Gold is Traditionally Used as a Hedge

"Gold usually moves in the opposite direction of stocks; it is often touted as an insurance policy against weakness in the stock market.

"Will Rhind, CEO of GraniteShares... says the metal is 'pretty much uncorrelated with every other asset class.'

"That relationship is clearest with the U.S. dollar. Gold is denominated in dollars, and the precious metal often moves inversely with the greenback, falling when the dollar rises and vice versa. Gold prices are generally stable because it is a real asset.

"'To increase the supply means bringing on new mine production, which is not an easy thing to do, (keeping) the supply relatively stable,' he says.

"There's also no counterparty risk with gold, which makes it a high-quality asset, Rhind adds.

"'Everything else in the portfolio has some element of credit risk or counterparty risk,' he says. 'Governments default on their debt, corporations can default. Gold can't declare bankruptcy.'

"Juan Carlos Artigas, director of investment research at the World Gold Council, the gold industry's market development group, says gold plays a unique role versus other risk-management assets.

"When stock prices are close to their historical average prices or fall by more than two standard deviations, gold prices move in the opposite direction, according to research conducted by the World Gold Council based on data collected from January 1987 to December 2018.

"Standard deviation is how much an asset moves from its average price. When stock prices rise more than two standard deviations, gold's value also rises. That's because of gold's dual nature, he says. "'Gold is both a consumer good, a luxury item as well as an investment,' Artigas adds.

"Richard Hayes, CEO of The Perth Mint, Australia's largest precious metals refining, minting and depository enterprise and the second-largest global gold producer, says gold is often used as an inflation hedge and a store of value.

"Conventional wisdom holds that gold should only be a small part of a person's portfolio, Hayes says, anywhere from 5 to 10 percent of a total portfolio allocation.

"'That allows investors to do two things,' he says. 'It allows them to hedge, but it also allows investors to move themselves perhaps a little bit further out on the risk curve that they otherwise might not be as willing to do because gold provides that ultimate hedge.'" ("How to Use Gold in Your Portfolio During Bear Markets," Debbie Carlson, US News, 02/07/19.)

Gold shines as concerns over global slowdown grow; likely to touch $1,350/oz: Reliance Commodities - Patnaik

There's a strong case for gold as a good investment as geopolitical tensions remain and amid concerns about U.S. slowdown and expenditures.

"Concerns over US-China trade war, a slowdown in global economic activity and buying from central bank augurs well for the yellow metal. Gold prices are likely to touch $1,350 in the medium term.

"For the past few sessions, there has been a small rally in the metal and energy prices. In normal circumstance, this upswing could be construed as a revival in demand and improvement in economic sentiment.

"Given the current state of the world economy, one must have their risk assessment hats firmly placed on their heads. The markets at large have been reacting to events rather than fundamentals.

"Big geo-political events, unfortunately, have been recurring with a regular periodicity, thus, ratcheting up the volatility factor.

"In the last few weeks we have seen large events like unraveling of the Brexit, reopening of the US administration (although temporary), slow progress in US-China trade talks, US Fed's dovish stand, Venezuela crisis and practically all central bankers throwing caution to the winds, as far as economic growth numbers go.

"While events can dictate prices in the short term, one will have to be careful while creating long-term bets, as those need to factor in fundamentals of supply and demand. Current markets are better suited for short-term plays with strict stop-losses.

"In the current scenario, gold seems to be the commodity of choice from a long-term perspective. From a short-term event perspective as well as long-term supply demand perspective, gold seems to be in a great position for a stellar run.

"Concern over US slowdown and rising expenditure augurs well for the yellow metal. Last week, US Fed Chairman Jerome Powell said case for a rate increase has 'weakened', with neither rising inflation or financial stability considered a risk, and 'cross-currents' including slowing growth overseas and the self-inflicted wound of a government shutdown making the US outlook less certain.

"Powell added that the central bank may end up with a larger balance sheet than anticipated.

"Second, the markets are also waiting to see the outcome of the US-China trade negotiations. Despite comments from US President Donald Trump that he would soon meet Chinese President Xi Jinping to seal a trade deal, Washington reiterated its March 1, 2019 'hard deadline' for an agreement to avoid implementing higher tariffs on a host of Chinese goods.

"Disappointing factory activity data across much of the globe also has fueled concerns about a slowing economy. All of which builds a rather strong case for gold as an investment.

"This sentiment is further bolstered by the fact that throughout 2018, global central banks supported bullion demand in a significant fashion.

"A multi-decade high in central bank buying (close to 651.5 MT) drove demand growth. Central bank gold purchases were the second-highest on record last year as central banks in India, Russia and Turkey, among others, added to their existing gold reserves.

"Technically, gold may see some correction after a smart rally, but the marginal fall in prices should be taken as an opportunity to create positions. The gold prices seem well on track to see levels of $1,350 on medium-term basis." (Gold shines as concerns over global slowdown grow; likely to touch $1,350/oz: Reliance Commodities," Pritam Kumar Patnaik, Moneycontrol, 02/08/19.)

Some Central Banks Have Gold Fever, and It Might Be Sensible - Pattanaik

Central Banks are buying more gold since 1971 due to concerns of the dollar's dominance and the rise of China.

"Gold bugs aren't always rational. That's not the case for central banks, whose purchases of the yellow metal last year were the highest since the United States broke the link between gold and the dollar in 1971. For these institutions, it's less a short-term gamble that prices of the precious commodity will rise, and more a concern that dollar dominance could gradually be eroded.

"Central banks bought 651.5 tonnes of gold in 2018, the second highest annual total on record and up 74 percent from the year earlier, according to the World Gold Council. As in the past three years, Kazakhstan, Russia and Turkey were significant buyers, but were last year joined by the likes of Hungary, India and Poland.

"Official foreign exchange reserve managers tend to be tight-lipped. But Hungary in October explained that it had increased its gold reserves tenfold for long-term stability reasons, rather than short-term investment considerations. The precious metal was in limited supply and it had no credit or so-called counterparty risks, because it was not a claim on a specific institution or country.

"Such thinking may seem like a version of one reason individual investors stock up on gold: because they are terrified of holding ostensibly riskier assets, like shares and bonds. With geopolitical tensions rife, that would be understandable.
"But there are two bigger reasons for central banks to buy gold:

  •  One is concern about America's use of dollar dominance in the global financial system to exert its authority.Germany, France and Britain have tried to open a new nondollar trade channel with Iran, but it probably won't be able to significantly subvert United States sanctions against the Islamic Republic. No wonder that the European Commission President Jean-Claude Juncker wants to promote the euro as a global currency, rather than accepting dollar price tags for planes, energy and other goods.
  • Even more important is the rise of China. Its economy accounts for almost a fifth of global gross domestic product and more than a tenth of global trade, but its currency makes up less than 2 percent of central bank reserves, as the Official Monetary and Financial Institutions Forum points out.

Reserve managers may not know how long it will take for China's currency, or the euro, to nibble away at the dollar's pre-eminence. But they are taking small precautionary steps to diversify their exposure away from the dollar. That is far removed from the blind enthusiasm usually associated with gold fever. ("Some Central Banks Have Gold Fever, and It Might Be Sensible," Swaha Pattanaik, The New York Times, 02/05/19.)

Gold climbs on global growth worries; strong dollar caps gains - Reuters

Uncertainty and political risks continue making gold go higher.

"Gold prices edged higher on Thursday, helped by concerns over the U.S.-China trade dispute and its potential impact on global growth. Spot gold rose 0.33 percent to $1,310.08 an ounce... after touching its lowest since Jan. 29 at $1,302.11.
"CNBC reported U.S. President Donald Trump and Chinese President Xi Jinping are unlikely to meet before March 2, the deadline the countries set for reaching a trade deal.

"'Uncertainty over U.S. China trade relations and the potential for another U.S. government shutdown continue to underpin interest toward $1,300 and should see supportive price action remain over the near term,' MKS PAMP Group said in a note.

"A firmer dollar makes bullion more expensive for holders of other currencies. The dollar index, which tracks the greenback against major currencies, was on course for a sixth session of gains and trading close to a two-week high.

"'There is still a lot of uncertainty in the market and that is keeping gold above $1,300,' said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York, adding that a strong dollar has been keeping bullion from going any higher.

"Gold rose to its highest since late April last week after the U.S. Federal Reserve kept interest rates steady, but it has since lost ground as the dollar has firmed.

"Mounting global growth worries dragged on equity markets. The extent of the current global slowdown was highlighted after India cut interest rates unexpectedly and data showed Germany's economy slowed in December, strengthening fears of a broader slump in Europe.

"Gold denominated in euros climbed to a fresh high during the day, hitting its highest since early May 2017, at 1,157.37 euros per ounce.

"'We believe that gold should remain in good demand after all, the political risks appear to be increasing again,' Commerzbank said in a note." ("Gold climbs on global growth worries; strong dollar caps gains," Reuters, CNBC, 02/07/19.)