Gold, like the Fed, ‘patient and watchful’ – biding its time

(USAGOLD – February 27, 2019) – Gold climbed back toward the $1330 mark in Asia overnight on a sudden escalation of tension between India and Pakistan. It then leveled off during European trading hours and is now trading at $1327 – down $2.50 on the day. Silver is trading at $15.89  – down 10¢ on the day. Gold held up well yesterday in the face of February options expiration and Congressional testimony from a “patient” and “watchful” Fed Chair Jerome Powell.  The metals’ market, in our view, is likely to read the market’s response to yesterday’s center-stage events as reinforcing the underlying, longer-term upward bias.

As it is, the gold market continues to move sideways within a tight range – biding its time and awaiting the next turn of events. It too is being patient and watchful.  Along these lines, International Adviser published an interesting quote from Merion Global Investors fund manager Ned Naylor-Leyland. “[N]ormalisation in rate hikes and the unwinding of central bank balance sheets,” he says, “has really gone the way of the dodo recently and that is very significant for gold because gold is about hedging your forward-looking purchasing power issues, and generally these things shift in very secular ways . . . But because everybody is a momentum investor now, I think that when it happens it will happen rather quickly because of this herd-like behaviour that you see now in respect to all assets.

Quote of the Day
“We have found that gold typically thrives amid deeper, longer-lasting and fundamentally driven bear markets, which are usually associated with a deteriorating macroeconomic outlook. Alternatively, gold’s performance is usually tepid when equities rise. A good analogy is home insurance: homeowners pay an insurance premium each year hoping the house doesn’t burn down, but if it does you redeem the policy. Here, we see gold’s “insurance characteristics” as becoming increasingly relevant for investors. But even if the insurance is not needed, gold could still offer value. If the US dollar slides (which we expect), emerging economies become wealthier while mining costs increase. Prices could therefore advance irrespective of US inflation, making gold more than just an insurance asset.” – Wayne Gordon, UBS Wealth Management

Chart of the Day

Chart note: When the United States abandoned the gold standard in 1971 and freed currencies to float against one another, the fiat money era began. We are still in that era today. This chart shows the performance of gold from the early 1900s to 1971 when gold backed the dollar, and the era from 1971 to present when it did not. Gold has had its ups and down since 1971, but clearly, over the long run, in the absence of an official gold standard, individual investors have been well-served by putting themselves on a private gold standard.

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