When Gold Breaks the Rules

The almighty dollar has dominated recent reports about the gold market, and with good reason. Gold is negatively correlated to the dollar, and traditionally serves as an investor flight to safety during periods of the currency’s decline. Under these circumstances, gold and the dollar ordinarily perform as though they were on opposite ends of an economic seesaw – dollar up, gold down; gold up, dollar down.  And when the world’s central banks choose to move gold in and out of their reserves that can also prove big news for the price going forward.

Still, we shouldn’t forget other influences that drive the price of the shiny metal.  One that’s at least as old as the hills where gold is mined: supply and demand.  According to a March 14 article by CNBC’s Huileng Tan, consumers in emerging economies are grabbing the physical metal while supplies are rapidly declining.  As a result of this increasing demand, Paradigm Securities’ Barry Dawes, in the video accompanying Tan’s article, is calling for higher prices during the next five years.

But the curious thing is that this particular gold upswing is occurring at a time when we’re seeing a stronger rather than weaker dollar. Indonesian, Malaysian and Vietnamese currencies have all fallen against the greenback in the last twelve to eighteen months.  As a result, consumers in these countries have been able to buy gold at cheaper prices. Now Chinese investors, running for their lives in front of their avalanching economy, are quickly moving their paper money out of the stock market and into gold.

But official buying is also at work in China.  Tan also reports that in February the People’s Bank of China added more than half a percent to its already commanding holdings of almost fifty-eight million ounces—and these are official figures, which are typically underreported.  What’s especially fascinating is that this flurry of Chinese buying flies in the face of the U.S. Federal Reserve’s stated plan to raise interest rates this year. Normally when rates go up the price of gold declines.  The Chinese know gold; why didn’t they wait? More to the point, what do they know that we don’t?

Furthermore, as demand is rising, supplies are tapering.  According to the World Gold Council, the global supply fell four percent last year to just over forty-two hundred tons – the lowest figure for above-ground supplies since 2009.  What’s noteworthy for investors is that demand can persist even during periods when the dollar strengthens and when the Fed suggests a rise in interest rates is close at hand.

Then again, it might be that investors are looking past what the Fed says it’s going to do, and focusing on what it ultimately does.  The Fed said it was going to raise rates just this month – then got a good look at the global economy and blinked.  Well that same sorry-state global economy isn’t going anywhere soon.

With all that in mind, take a good look at your portfolio. Can you take profits in any of your stocks right now? If so, consider moving funds over to physical gold, or even taking your 401(k) or IRA and rolling it over to a gold IRA, which would allow you to hold not just stocks and bonds, but also physical precious metals coins. Doesn’t it make sense to take possession of a tangible asset for which demand is currently high and supplies are low; one that also defies the dollar no matter which direction it moves?

Gold is an investment for all seasons and a hedge against many financial threats.  Just ask any central banker.