4 June 2020


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In addition to all the regular features of Global Assets, the next edition is our Winter edition and will also have two special features:

(1) Investment funds for everyone.

(2) Finance Centres : Bermuda and Switzerland

The copy deadline for this edition is Wednesday, 29th January, 2020.

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2016 - Gold's "Mini-Rally" Continues

By Walter Pehowich, VP of investment services at Dillon Gage Metals

Without a doubt, early February saw a spike in gold prices that continues to this day. Commentary and inaction by the Fed to leave interest rates alone, now predicting only one to two more rate hikes in 2016, was a direct contributor to the rally. But there have been other factors as well…

Gold Rising
Looking into the crystal ball for the rest of the year, here are some factors that may affect the price of gold: First, the price of gold and the U.S. dollar. The value of the U.S. dollar and price of gold are inversely related. Because gold is traded in dollar terms, a weaker dollar will increase the value of gold. As witnessed so far this year, whenever the Fed hints at raising interest rates, the dollar strengthens and gold sells off. For example, at the March meeting, the FED commented that only two rate hikes are expected now in 2016, down from four previously predicted. What happened? Gold rallied $32 dollars in just one hour. Historically, supply and demand issues should be the major factor on which moves the price of gold, not comments from the FED. But this could only be the beginning.

While there are many factors that can cause a tsunami in the gold price, you first need to experience the rumblings before the big wave hits our shores. It may have already started. Gold hit a low of $1,046 late last year as the world started to experience negative interest rates in some foreign countries, which increased physical demand on their shores. No one in these countries can expect any rate of return from the banks with negative rates, and some investors are worried about the buying power of their currencies going forward. So gold turns out to be an interesting investment for many. For some, perhaps it’s the only choice.

Positive Vibes in Europe
Here’s one good reason why gold is a good investment now that some people may have missed: On March 10, the European Central Bank cut rates, charging banks from 0.3 to 0.4 percent to hold cash overnight, putting Denmark, Sweden and Switzerland in negative territory. So if you are a banker in Europe, what can you do in order to eliminate this cost? They don’t have much of a choice. Since they need a return on their cash, they make new loans.

This situation has the potential to spark a couple of scenarios where both would impact gold:
  • Some think this action might drive banks to make more risky loans in order to make the bank more profitable. But remember when U.S. banks issued a significant number of mortgages to unqualified borrowers who bought houses that they couldn’t afford…leading ultimately to the 2008 financial crisis? Of course, that dark time was driven by more than just a need to be merely profitable; it was spawned by greed that led to the “big short” or risky loans on steroids. So if more risky loans are indeed written, regardless of the reason, shouldn’t that be cause for concern and possibly inspire more investor faith in gold?
  • With some European banks charging everyday customers a fee for keeping money on deposit in the bank, in addition to all the problems that the average Joe is facing in Europe these days (the inability for governments to meet pension obligations; the tremendous influx of migrants who must be fed and housed, putting a strain on the EU balance sheets; reoccurring tragic violence as we just saw in Brussels), where will the average investor put their money? The safest place—gold.
Will the Rally Last? Market Volatility to Consider
Without a doubt, investors should always be cautious. Factors that could affect the gold market could be put into two categories: the upcoming Presidential election and the $19 trillion debt we are facing. Either the Presidential election, and/or the increasing national debt can be a significant factor in the price of gold this year.

On the political side, potential hostilities could occur later in the year relating to who will become the Republican candidate and ultimately who will win the White House. And if our elected officials are unwilling to address the debt, this can create future turmoil in the markets. Ignoring the debt can cause a downgrade in the credit worthiness of this country - a factor we ignore every day. And we cannot ignore how we cover the costs for all the entitlements we are obligated to pay. Sounds like the start of the same problems Europe is now facing.

Don’t Ignore the Silver Market
With much attention focused on the mini-rally in the gold market, one would still be wise not to ignore the path of silver—which has been doing every bit as good as gold in the marketplace. Investors have been building up their silver ETF holdings, which have climbed to a high around 19,824 tons. The all-time high is 20,073 tons. 19,824 tons = 634,368,000 ounces held.

Some financial advisors report that retail investors are interested in diversifying their portfolios and in turn are buying physical silver. Financial advisors are reporting that investors think silver may be a better investment than gold in the long run, as they say silver has the bandwidth and ability to triple in value.

Walter Pehowich serves as executive vice president of precious metals investment services for Dillon Gage Metals, an international precious metals wholesaler. With over 40 years in the precious metals trade, Pehowich shares his industry insights and market analysis several times a week on the Dillon Gage website’s Market Gage Blog.