by John Browne, Euro Pacific Capital:
As 2015 came to a close, most investors believed that 2016 would be a year dominated by a series of Fed rate hikes. That conviction solidified in mid-October when comments from multiple Fed officials convinced many that prior hints that the Fed would stay at zero percent rates had been false alarms. The Fed delivered on its promise in mid-December by actually raising rates by 25 basis points. Based on this, gold declined by 10% from October 14 to the end of the year, nearly matching its six year low. Many on Wall Street thought the declines would continue into 2016. They were decidedly wrong.
In the first 14 weeks of the New Year, gold rose 16%. The first quarter qualified as its best beginning year performance in 30 years (CNBC, E. Rosenbaum, 4/14/16). The reversal was prompted by stumbling stock markets and a series of sharply dovish turns from central banks around the world.
Perhaps the main reason people buy gold is as a hedge against inflation. But uncertainty and fear contributed undoubtedly to gold’s stellar first quarter rise. But will it continue? Opinions vary among some of the most revered gold analysts in large financial firms. They remain focused almost exclusively upon the major historical influence of the inflation outlook and possible rate hikes. And as a result, the mainstream financial firms have yet to alter their decidedly bearish outlook on gold. This could prove positive for those who take the contrarian position.
In March, Kitco reported that Robin Bhar, head of metals research for Societe General, forecast an average gold price of $1,150 an ounce for 2016. Combined with the likelihood that fear and uncertainty are receding, Bhar believes that there may be a growing realization that “the risk of an imminent U.S. recession, while not negligible, is far lower than the markets are currently factoring in.” He expects the Fed could deliver multiple rate hikes in 2016 and perhaps several during the course of 2017. If this were to happen, the dollar should strengthen and gold should fall.
Mr. Bhar’s view is supported by Goldman Sachs’ global head of commodities, Jeff Currie, who in a CNBC TV interview on April 5threcommended not just a sell of gold, but a short sale. Given the drift of central bank policies around the world, it’s hard to imagine why these banks can hold to these beliefs. This is particularly true in light of how widely and rapidly negative interest rates are spreading around the world. Bloomberg reports that as of Feb. 9, 2016, over $7 trillion of bonds, comprising some 29 percent of the Bloomberg Global Developed Sovereign Bond Index, offered negative yields. Another $9 trillion yielded zero to one percent. It is widely accepted that this number will grow rapidly as central banks push yields deeper into negative territory. These rates have already started to be passed through to consumers, who are being charged interest on their bank deposits.
Negative rates are now looming so large that on April 15, the Wall Street Journal dedicated almost its entire “Money & Investing” section to the global consequences of negative rates, a phenomenon that has no precedent in human financial history. The section included five separate articles that detailed the absurdities of negative rates, the strains they are placing on the financial system now, and the risks they create for the future.
When bank charges are leveled on cash deposits that earn no interest, which are held in debased fiat currency, it may become tempting for more and more individuals to withdraw their funds. Their alternatives could be to buy stock investments, or to hold physical cash in the form of bank notes (which may or may not be stuffed into mattresses). A fall in bank deposits could hurt banks just when they may be hit with fines and increased regulation. Furthermore, even if arguably remote, falling deposits could trigger a cycle of further withdrawals. Given that central banks may confront such a scenario with even more currency debasement, precious metals could become an alternative form of cost-free cash.
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