Gold Rebounds in 2016
Joe, since the beginning of the year, it looks as if gold has broken its links
with both the U.S. dollar and commodities. Is this correct?
FOSTER: Yes, we've seen many changes in the financial system just this year,
and one of them is the relationship between gold and the U.S. dollar.
Throughout the bear market, a strong dollar has meant weak gold prices, and
we've seen the normal situation where there's an inverse correlation between
gold and the dollar. This year, however, there's been more financial risk
driving the gold market. People are worried about what's happening in Greece,
what's happening in the Middle East, negative interest rates, Federal Reserve
[“Fed”] policies that are essentially not as effective as they should be.
Investors have a heightened sense of financial risk, and in this type
of environment, people also look to gold as a safe haven. The U.S. dollar is
the first safe haven of choice, but when it looks a bit shaky, people then turn
to gold. Thus far in 2016, the dollar was firm in January and the gold price
was rising. In February, we saw a selloff in the dollar -- a selloff that we
haven't seen in many years -- and that benefited gold. And we've seen many days
where both the dollar and gold have been strong, as both are being used as a
safe-haven investments. As far as commodities go, that's another shift that's
very interesting to us and we are watching it closely: The link between gold
and commodities. Weak commodities prices have been a drag on gold for a number
of years now. This year, we've seen new lows in crude oil, new lows in copper
and other commodities, yet the gold price has been strong. So gold is, again,
performing as a financial hedge and a currency hedge, and not so much as a
commodity. That's a very positive change in the gold market this year.
BUTCHER: How has the Fed’s December rate increase [on 12/16/2015] affected
FOSTER: I think we'll look back at the Fed rate increase as
a turning point in many markets. We're in a post-crisis economic environment,
and a Fed tightening cycle is different now than it would have been in past
cycles. The tightening cycle actually began back when the Fed started tapering;
and then it talked about raising rates. And then the Fed finally increased
rates in December. It appears through market action this year that the economy
probably wasn't quite ready for the Fed to start tightening yet. And that's
introduced financial risks that the market is afraid of, and it's resulted in
gold trending higher on safe-haven demand.
BUTCHER: What have the
technicals been doing this year?
FOSTER: The gold price has been in
a technical downtrend for several years now, since 2013, and it had been slowly
trending lower. That trend was broken this year, when gold broke through the
$1200 level. With this break in technicals, that's another shift in the
financial markets that are going in gold's favor for 2016.
BUTCHER: What is your outlook for the second quarter?
Our outlook is favorable based on both the technicals and the fundamentals.
Fundamentally, for the first time in a number of years, investors are worried
about the financial system. We have negative rates in Europe. We now have
negative rates in Japan. Investors are worried that monetary policies just
aren't having the intended positive effects. We are not seeing the economic
growth or the prosperity that has been promised by the central bankers. With
this increased financial risk, we're seeing more people looking to gold as a
safe haven, as a hedge against these types of financial risks.
the technical side, we've broken the downward trend that's been in place for a
number of years. Gold has risen through $1200. Now that it's passed through
that technical level on the upside, the next challenge will be to maintain that
level. In other words, will $1200 become a floor instead of a ceiling in this
market? This is what we're looking at in the short term. In the longer term, I
think the perceived financial risks will probably grow. I think we'll look back
on the Fed rate increase as a significant turn in the financial markets, but
unfortunately, for the worse, not for the better. But this will benefit gold as
an alternative investment and safe haven hedge.
what are gold stocks doing in this environment?
FOSTER: Gold stocks
are performing very well, as we thought they would in a rising gold market.
Gold bullion is up about 17% this year [as of 02/24/16]. Stocks are up roughly
double that amount. The gold miner's index is up roughly around 35-36% this
year. So we are seeing the leverage come back into these gold stocks in this
rising gold price environment. And that's brought on by a couple of things.
First, gold company stocks were oversold in the bear market, so the valuations
look attractive. And also, fundamentally, they are much better-run businesses
than they were a few years ago. Gold mining companies have been controlling
costs and doing a much better job of managing operations, making them both more
efficient and profitable. This translates in to better leverage to the gold
BUTCHER: Joe, thank you very much, indeed.
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