Current valuation the shining hour to invest in gold

Why investing in precious metals could be the ideal defence against the volatility expected in the markets this Autumn.

Historically September is on average the best month of the year to invest in gold and autumn the best season of the year, partly because of the Indian religious and farming calendar.

This September, gold is coming off a price retrenchment over the summer from its best first-half performance in several decades. This is the sort of pattern you usually see in technical charts before another major price advance.

If you have been thinking about an investment in precious metals then this looks a great moment to do it.

From a technical perspective the new gold bull market remains intact after the pullback over the summer. The price weakness in August just brought it back from an overbought to almost oversold level.

However, I am far more interested in the short and longer term fundamental reasons for investing in precious metals now. The bigger picture is very gold-positive.

Coming up we have the next meeting of the Federal Reserve on September 21, and more nonsense about will-they or won’t-they raise interest rates. They last did this last December.

This just won’t happen this side of the US presidential election on November 8. Why? A rise in interest rates would tank the stock market and help Donald Trump.

The Federal Reserve does not want to be seen to be so partisan and Mr Trump has said he will fire the Fed chairwoman Janet Yellen if elected, so self-preservation is a factor here too.

That will be gold-positive because fear of interest rate rises is bad for gold investment. Higher interest rates make the dollar a more attractive proposition as gold pays no interest, or at least that is supposed to be how it works.

In practice the overarching fear in financial markets this autumn and the immediate cause of heightened instability will be the very real possibility of Mr Trump as US president. It is not so much that they fear a monster, which the egocentric, 70-year old real estate billionaire is not, but the uncertainty about what he might do if elected.

What will this do to an overbought stock market trading close to all-time highs after a record breaking bull run? At the very least it ought to have some people worried about holding onto their stocks.

It could be a full-on stock market crash in the traditional month of October.

And where will they put their money after selling their stocks, which incidentally Mr Trump has already said he thinks are in a bubble?

Precious metals are the obvious safe haven this time around. This was not so in the previous global financial crisis because the dollar provided a better alternative. Back then gold initially took a pasting, although it rebounded faster and higher in value than any other asset class except silver.

But today the dollar stands at a 12-year high in another valuation bubble.

Certainly the US bond market shrieks dollar bubble territory with yields never lower in history.

Gold, on the other hand, in the mid-US$1,300s is well off its 2011 all-time high of $1,923; silver around $19 is down from $48 in 2011.

Now say a new US president decides to embark on a government infrastructure plan to revive the economy, and this is a fairly popular campaign message from both candidates. Borrowing big and devaluing the dollar in tandem would follow. And markets would quickly discount this.

Then the only currencies that are going to gain will be the oldest of all, gold and silver. Central banks can print every other sort of cash.

Over the next few years the central banks are going to have to reset currencies or the financial markets are going to do it for them. Probably that will involve a new role for gold, at a much higher price than today, to establish confidence in a new monetary order.

Having said all, that I wonder what is the bearish case against gold now? We know that a sudden hike in interest rates would weigh on the global economy, so that is not going to happen.

Then again interest rates are so low, and even negative in many places, so this stimulus to bond and share prices is close to its absolute limit.

Overbought conventional investment classes are in a very bad place indeed. Stocks, bonds and cash have nowhere much to go in value except down.

What you need to buy is a gold or silver-plated insurance policy while you still have the chance. Fortunately they currently don’t cost much.

Peter Cooper has been a journalist in the Gulf for 20 years.

pf@thenational.ae

Follow us on Twitter @TheNationalPF

Published: September 9, 2016 04:00 AM

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