The Strong Case for Gold
    Category: Smart Investing 2016 By : William Gray Read : 604 Date : Monday, June 20, 2016 - 02:48:29

    The world’s financial landscape has begun to change, which could soon cause a significant amount of money to move out of U.S. dollars. This significant change revolves around an announcement made last November 2015 by the International Monetary Fund (IMF) that China’s yuan will join the elite currency basket, which includes the major currencies of the world, namely the U.S. dollar, Japanese yen, the pound and the Euro. The inclusion of the yuan is recognition of the larger role China plays in world markets and its position as the second largest world economy.

    Central banks now have an opportunity to move into the yuan, mostly at the expense of the dollar. The above is a strong case to buy gold, as it offers both insurance against uncertain outcomes in our financial system and, importantly, a hedge against a declining U.S. dollar.

    Acquiring a significant quantity of gold perhaps to support a national currency is considered desirable, especially to become a reserve currency, a goal for China. China has been acquiring a considerable amount of gold in recent years through both their mining production and vast importing, underpinning the belief that China under-declared their gold reserves in 2015, thereby understating the full extent of these reserves.

    Gold will likely continue its current rally for six fundamental reasons:

    1) A rate hike by the U.S. Federal Reserve supports gold. When the Fed raises rates, gold typically weakens then rallies. The hike of 25 basis points in December 2015 had a significant negative impact on markets. Consequently, the Fed has cut its forecast for the number of hikes this year from four to two—good news for gold. Scaling back on the forecast for lifting interest rates triggered a gold rally, and any further downplaying of rate hike expectations should keep the gold market buoyant. The longer the Fed delays raising rates, the better for gold.

    2) Fed caution weakens the dollar. The broader theme is USD weakness, and a weakening dollar strengthens the support for a gold rally.

    3) Stock market had the worst start to a year on record and volatility is almost certain to continue. The third reason is considerable volatility in equity markets, continuing from last year. The increased volatility coupled with what has can be described as a market sell out at the start of the year would indicate that a negative risk/reward position has started. Without substantially lower prices or structural reform, there would appear to be considerable risk in this market, and gold offers insurance against continued volatility.

    4) The Brexit issue in UK. The Brexit vote on June 23 will also affect gold. An affirmative vote would hurt equities and be positive for gold. While I would forecast that a “yes” vote unlikely, having portfolio insurancein the form of gold would be wise given the additional risk from this political event.