The Science behind Money and Happiness
Posted onIt’s the age-old question. Can money buy happiness? While conventional wisdom says no, researchers are upending traditional thinking here.
It turns out how you spend your money can impact your happiness levels, according to research from Harvard Business school professor Michael Norton. People who spend money on experiences – not things – brought higher levels of happiness.
Adding in another layer of research, the further that people think and plan ahead for their future, the higher levels of power and happiness they feel in their lives, according to a Morningstar report by behavioral economist Sarah Newcomb Ph.D.
The key takeaway: Creating economic stability now and in the future helps people achieve higher levels of emotional well-being.
“According to the American Psychological Association, year over year, money is the number one source of stress in U.S. households, regardless of the economic climate. Given that stress leads to health problems, lost productivity, relationship problems, and an overall loss in quality of life, it’s clear that the emotional aspects of a person’s financial life are a critical part of their overall financial health,” the Morningstar report said.
Here are key findings from the Morningstar report:
- Time is money – The further ahead a person thinks in time and the clearer their picture of the future, the better their behavior in terms of cash, credit, and savings management. This effect was significant even when controlling for income, age, education, and gender.
- Power is happiness – Across all income levels, people who believe they create their own financial destiny experience, on average, display more positive emotions with respect to money than their peers who believe they do not have power in their financial lives. The effect of perceived power on emotional wellbeing was greater than that of income, age, education, and gender.
Focus On What You Can Control
When it comes to finances and investments there are aspects that you can control and variables that you cannot control. Focus on what you can control. Here are some examples of factors you can control:
- The $ amount that you save each month.
- The types of assets that you buy.
- How well you diversify your portfolio.
Financial advisers suggest saving and investing different percentages of your income. Some may point to 5%, while others may say saving 20% of your income is a better target. When it comes to building long-term wealth and saving for retirement, you probably won’t run into the problem of saving too much.
Take the time now to think about your long-term financial goals. Write them down in detail. Then, develop a plan to help you get there. There are investors who purchase a set amount of gold and silver assets each month, as part of a dollar-cost-averaging plan. Just as you might divert a certain amount of your income to the stock market each month, diversify your portfolio with investments into gold and silver.
Gold and silver are proven portfolio diversifiers and also act as a vehicle for long-term wealth building. Boost your happiness levels now and in the future by taking control of your financial life and building an investment plan. A Blanchard portfolio manager would be happy to work with you to discuss your long-term goals, your level of risk tolerance and help you create a plan to move your closer toward your dreams.
Bizarre Week for Markets
Posted onThe S&P 500 and Nasdaq 100 just had one of the most volatile weeks of 2017. To recap, stocks opened up largely higher on Monday of last week before inexplicably declining to finish out the day. Tech shares sold off dramatically, for the second time, on Tuesday and dragged many large-cap stocks along for the ride.
Investors evidently took advantage of Tuesday’s sell-off and bought the dip on Wednesday. The S&P 500 had its third best day of 2017 on Wednesday as it rallied almost 1% while the Nadsaq 100 was up nearly 1.5%. History tells us that when stocks have such a strong rally, it’s not uncommon to see the rally extend for several more days. This is especially the case when stocks close at the high of the day, as they did on Wednesday.
After the market closed on Wednesday, the Federal Reserve announced that every major bank, except for Capital One, passed their “stress test” and had more than enough cash on hand to withstand adverse economic conditions. As a result, banks rushed to announce shareholder buybacks and increased dividends.
Bank stocks rallied tremendously after hours and pushed the S&P 500 and Dow Jones Industrial Average up around 25 basis points (0.25%). The rally held right up until Thursday morning when the Nasdaq began declining sharply due to weakness in tech stocks. The selling didn’t stop and S&P 500 futures plummeted from $2,445.00 to $2,402.75 before rebounding 20 points to close out the day.
However, the real focus was on volatility. Because of the sharp and relentless decline in stocks on Thursday, the VIX soared over 40% and peaked at 15.16. The mysterious volatility buyer mentioned in last week’s article, who purchased over $3 million worth of VIX premium, saw almost a three-fold profit on the risky trade.
Needless to say, market participants were scrambling on Thursday. Although the Nasdaq was off more than 2.5%, the S&P didn’t even come close pushing past the 2% mark.
“When you get extended rallies, the kind we saw in technology shares, prices tend to come down a lot faster. Though, when markets drop 1%, it’s hardly a selloff,” said Joe Saluzzi , partner, co-head of equity trading at Themis Trading.
“It is still perplexing to see the stock market climb to highs when the bond market is signaling a slowdown. One of these markets is not right,” Saluzzi went on to say.
Regardless of where market participants think the market will go in the coming months, the dynamic has undeniably changed. For the first time since the November 8th election, sell-offs are occurring more frequently and with far more velocity. Enough velocity, in fact, to get a spike in the VIX of 40%, which is not trivial.
Unusual market moves also occurred in the precious metals realm last week. Early Monday morning, when liquidity is typically less than during normal market hours, a massive order to sell 1.8 million ounces of gold took prices down nearly $20. Many brokers and CTAs chalked the order up as a “fat finger” trade, which is trader jargon for an accidental trade. Gold recovered relatively quickly after the massive order but finished out the week with a bit of a whimper beneath the key level of $1,250 per ounce.
Trading was shortened this week by the Independence Day holiday yesterday, so volume and activity is expected to be lighter than normal for the remainder of the week. Liquidity, or the number of people willing to buy and sell securities at specific prices, will also be lighter than normal. Judging by last week’s activity, it wouldn’t be unusual to expect more volatility in the coming weeks with less liquidity due to summertime.
How to Airlift 214 Tons of Gold
Posted onThere was no time to weigh the gold, the total was estimated on the fly. It was 1967 and people were frantic. The US Treasury was loading a Starlifter, a massive army transport capable of flying payloads of more than 60,000 pounds. This is what it looks like when the US Government makes the single largest outgoing gold delivery in history.
Several flights were needed to complete the transfer. Each plane carried $100 million worth of gold. Every flight landed at a Royal Air Force base in the UK. The final destination was The Bank of England. “Panic reigns in the gold market,” wrote one Treasury official.
The delivery of gold to the UK was a response to surging gold purchases following a devaluation of the British pound. The Bank of England was unable to satiate the mounting demand. People were losing faith in England’s currency. Other economies, like Japan, began to show signs of weakening support. Gold purchases increased further boosting prices even more. In his recent book One Nation Under Gold, James Ledbetter explains “the volume of gold traded nearly quadrupled.” What happened next? “That was when The Bank of England told the US Treasury that it could no longer back up the markets daily transactions.” Eventually, the US decoupled gold and the dollar.
The dollar became the “mechanism of exchange.” Today, this is hardly shocking or even interesting. However, at the time, amid such uncertainty, Americans were ushering in a new era where the economy changed nearly overnight. This was something different. Ledbetter astutely remarks that while FDR did take the U.S. off the gold standard earlier in the 1930s, there was still a mandatory stock of gold supporting the dollar. This practice was not an abstraction. There was a vault. There was a key. Suddenly, this wasn’t the case.
Meanwhile, for a period, Americans were restricted by law from owning gold. This limitation only added to the already pervasive sense of unease. How does one protect their assets from the inherent problems with a paper currency backed only by confidence? Many turned to pre-1966 silver coins. They hoped the rising value of the metal would buoy their assets against another crisis.
Not until 1974 would Ford permit Americans to own gold. However, the market has taken an interesting turn since those days. Today’s investors have exposure to numerous methods for owning gold that, somewhat ironically, are reminiscent of the anxieties of an earlier time. Products like gold ETFs make ownership easy but put no real metal in the investor’s hands. What’s more, investors of these instruments have no claim to the physical asset. Starting to sound familiar?
Too often these kinds of investments only serve to make the individual feel like they own gold when in fact their owning paper and sometimes not even that. Too many embrace these modern solutions while forgetting their resemblance to an era when people had no real cover for their assets. Fortunately, the savvy gold enthusiast still has places to go to own the real thing.
Is Another Housing Bubble Building?
Posted onFrom the tulip bubble in the Dutch Republic in the 1600’s to the South Seas bubble in the Great Britain in the 1700’s to the Dot.com mania in 2000, history is littered with bubbles. They have one thing in common – they always pop.
If you or anyone you know has been house-hunting lately, you are well aware of the “tight inventory” situation. There’s more buyers than there are houses right now, and that is pushing home prices higher.
While investors often get sidelined by vacations, lazy weekends at the beach, and spending time with friends and family during the summer months, there are underlying economic developments that bear watching.
Remember 2005?
Developments in the U.S. housing market have some economists hearkening back to the housing bubble that occurred about a decade ago. Within the new home arena, the impact is startling. The Fed’s still ultra-low interest rate policy, combined with the relative lack of supply have sent new home prices soaring.
The median new home price has skyrocketed 16.8% over the last year to $345,800, which is an all-time record high.
“Housing inflation is back, big time,” says Chris Rupkey, Chief Financial Economist at MUFG Union Bank, N.A. “This home price appreciation is certainly as rapid as it was during the housing bubble years and just as worrisome. The collapse of housing prices helped make the Great Recession great so we hope the Fed knows what it is doing,” Rupkey warned.
“Home prices are on fire with a new bubble in the making,” Rupkey warned. “Home price inflation isn’t going to stop either until the Fed starts moving up interest rates at a faster pace. The Fed says it cannot move up interest rates more quickly because ‘the natural rate of interest’ remains low, still encountering headwinds from the recession, but there is nothing natural about the rate of home price appreciation. It’s outasight.”
Moving to the high end of the real estate arena, the ultra-wealthy have been snapping up New York City condos like hotcakes. Another market commentator warned that a real estate bubble is in the works pointing to these examples in the high-end luxury market in Manhattan:
In 2014, the first New York City condo was sold for more than $100 million at One 57.
The cost was reportedly, $9,136 per square foot in 2014. Last year, however, in 2016, a swanky 16-bedroom penthouse at 220 Central Park was listed for $250 million. A deal or a bubble?
Before the next housing bubble in the U.S. has negative spillover impact on the broader economy and the U.S. stock market, take the time to properly diversify your portfolio and protect your assets with gold and silver.
Market Update: Gold Sees Modest Weekly Gain, Buyers Emerge On Dip
Gold prices closed slightly higher on a weekly basis on Friday. Buyers once again emerged as gold dipped toward the $1,242.00 an ounce level mid-week. Investors continue to wait in the wings and are buying gold and silver on price retreats.
The trend remains bullish for gold and other precious metals. Although the summer doldrums has seen quieter activity, gold is nearly matching the stock market’s gains year-to-date. Gold is up 8.32% through late June, versus the S&P 500’s gains of 8.91%.
For historical reference, gold investors may be interested to know that the price of gold climbed from $451 an ounce in 2004 to over $1,900 an ounce in 2011. Current prices in gold around $1,240 an ounce offer extremely attractive buying opportunities relative to the all-time high.
Is a Sell-off Coming? One Mystery Investor Thinks So
Posted onUS equities came out of the gates running last week by starting with a firm rally across the board on Monday. The S&P 500, Nasdaq 100, and Dow Jones Industrial Average were all largely in the green as the tech sector gained substantially. Most of the gains were driven by the largest company in the world by market capitalization, Apple, as the computer giant announced plans to develop an augmented reality app that enables consumers to virtually test furniture from home before they make a purchase.
Evidently, the news was enough to excite investors and the S&P 500 hit a fresh all-time high during Monday’s trading. Nevertheless, stocks managed to give back some of their gains later in the week with softer than expected economic data and weak crude oil prices.
However, slight weakness in domestic equities was drastically overshadowed by weakness overseas. The benchmark FTSE 100 index finished in the red for four straight sessions ending last week with a loss of 0.50%. Overall, the index has fallen for three consecutive weeks, which is the longest stretch of losses for the index in a year.
Essentially, much of the weakness in global stocks can be attributed to the relentless dive in the price of crude oil. Crude oil prices directly affect both European and US energy companies.
“The enormous volatility in the oil market is unsettling investors around the world. The fear of falling inflation and reduced growth prospects is at the forefront of traders’ minds. It is not unusual for us to witness rallies, but the big picture is that oil has been falling since March, and now the selloffs are becoming even more severe,” said CMC Markets analyst David Madden in a note to clients.
Because the energy industry represents a significant portion of bedrock companies in the US and Europe, it’s difficult to have rallies when the entire sector has plummeted 15% YTD.
The plunge in oil prices even has some traders wondering if it will alter the Federal Reserve’s rate-hike agenda. But a fixed income strategist for BMO Capital Markets noted how “the Fed doesn’t respond to it much because oil is so volatile.”
At this point, it’s unclear if oil inventories will continue to rise and prices will continue to fall, despite OPEC’s concerted efforts. If prices continue to slide, it’s not unreasonable to see further weakness in markets around the world.
Along those lines, one mysterious investor is particularly bearish in the next couple of months. On Tuesday of last week, an unknown investor purchased $3.8 million worth of VIX call options. The large trade of 74,300 contracts had everyone on the Street buzzing, because the trade will only pay off if there is a stark decline in asset prices and a huge pop in volatility.
Basically, there will need to be somewhat of a stock market crash between now and mid-August when the options are set to expire. Otherwise, the options will expire out-of-the-money and be completely worthless and the $3.8 million will be fully lost.
Because of the large size of this trade, many investors are wondering if the mysterious buyer of volatility knows something that other people don’t. Regardless, if there is a large increase in volatility and the VIX due to an unexpected market plunge, gold arguably stands to benefit just as much as the call options, if not more. And, unlike the calls purchased last week, gold won’t expire worthless if nothing happens in the next two months.
Therefore, gold truly is one of the better investment vehicles of this generation, because it serves as a prudent investment and a hedge against a market catastrophe.
For over 40 years, Blanchard and Company has helped over 450,000 clients invest wisely in precious metals and rare coins. Call us today at 800-880-4653.
Operation Goldfinger
Posted onCash is nice, and stocks are fun, but nothing beats gold. Nothing. This sentiment was the focus of America’s ruling politicians in the mid-1960s. Fearing a gold shortage, President Kennedy remarked in a closed-door meeting “If everyone wants gold, we’re all going to be ruined because there is not enough gold to go around.” The gold standard was still a pillar of the U.S. economic system.
There was a problem. Sourcing gold through conventional mining was becoming increasingly difficult. In fact, many mining operations in the U.S. had shut down amid more successful competing mines in other countries. If Kennedy and others couldn’t find gold underground, they would find it somewhere else.
Operation Goldfinger endeavored to extract gold from the strangest of places, seawater, plants, meteorites. Scientists even added deer antlers to the list of places they would look for gold. The administration recruited a leading scientist who formerly worked on the Manhattan Project. This, apparently, is what it looks like when the government goes on a gold hunt.
They kept the project secret calling it a routine mining exploration project. Kennedy and others feared this frantic quest for gold might be perceived as desperate among the international community. After a few backroom handshakes, Operation Goldfinger was a go.
Some of the greatest minds in technology designed new ways to search for gold. Methods carrying esoteric names like mobile neutron activation promised to scour for gold without having to collect a single speck of dirt from the ground. The technique resembled a million-dollar, heavy duty metal detector anchored to a truck. Before long the team added X-ray technology to their arsenal of research tools.
Remarkably, they did, in fact, find gold in obscure places. The problem: there was never enough to make the find worth their while. They were excellent and finding traces, but the motherlode eluded them. If they couldn’t find big deposits, they would make them. In its later years, Operation Goldfinger turned to atomic science in an ambitious attempt to engage in alchemy. Of course, none of it worked. In a bold move, the scientist put serious consideration into using nuclear detonation to penetrate potential gold deposits deep underground. In the end, the “nuclear option” worked, though it didn’t require a blast shield.
The “nuclear option” was the decision to step away from the gold standard all together. One evening, in mid-August of 1971 in a televised message, Nixon announced that he was pulling the dollar off the gold standard. Less than a decade later President Ford signed a proclamation legalizing gold ownership for U.S. citizens.
Today, gold remains as desirable as it did to American scientists scouring the ocean depths for hints of gold. While abolishing the gold standard was likely a necessity it created a problem we still see today; the government prints more money and goes further into debt. Meanwhile, gold investors still hold the inherent value of the rare metal in hand knowing that it’s a relic from a time when currency was backed not by confidence but by literal weight.
Here’s Why You Should Buy a $20 Saint Gaudens Right Now
Posted on — 1 CommentThere is an unprecedented undervalued condition in the rare coin marketplace right now. The premiums on circulated gold coins have plunged to extremely low levels this summer. That means investors can purchase a rare circulated gold coin at a historically low spread price to gold bullion.
The premium, which is simply the price difference between an American Gold Eagle coin and the $20 Saint Gaudens, is very narrow. The Saint Gaudens “Double Eagle,” of course, is considered by many the most magnificent and sought-after U.S. coin of the 20th century. The value of the St. Gaudens gold coin is in its intrinsic rarity, and it is highly prized by investors. That means it tends to appreciate faster than the price of gold itself.
Here’s what you need to look at now to understand current market dynamics.
Compare: The price of gold per ounce to the price of the Double Eagle coin.
Current Price (Changes daily)
1 oz. 2017 American Gold Eagle coin $1,340
$20 Saint Gaudens Coin No Motto MS64 Certified $1,526
Precious metals investors understand the value of holding a hard asset. Buying a 1 ounce American Gold Eagle coins is a smart diversification tool that is appropriate for all investors.
The Gold Eagle is a great investment, but this is not a rare coin. The $20 Saint Gaudens series are rare gold coins minted from 1907 to 1933 and have almost the same amount of gold. These coins were minted with .96750 ounce pure gold.
When ratios get out of whack in the marketplace, it offers investors a unique opportunity to purchase nearly the same amount of gold, with a rarity factor. That means once the price of gold begins to climb significantly, the price of the Saint Gaudens will rise even faster. If you are looking to purchase gold right now, it actually makes better investment sense to purchase a Double Eagle over a Gold Eagle coin.
Historical Pricing
Let’s look back for some examples. Since 2003, the Double Eagle premium has fluctuated from a low of 1.10 above gold to a high of 2.41. In 2003, it took 1.28 Gold American Eagles (1 oz.) to purchase one St. Gaudens Double Eagle.
In 2009 – Gold Spot Price Average $972.35 Then, in 2009, you could trade that one St. Gaudens Double Eagle in for 2.41 Gold American Eagles (1 oz.)
2017 – Current Gold Spot Price $1,283.80 – Buying Opportunity
Right now, we are on the front end of that cycle again, and the ratio is even better than last time!
Based on the past eight years, there is a tremendous buying opportunity based on the premiums of the Double Eagle vs. gold. As the price of gold rises, the premiums will also rise, which creates a better profit potential than gold moving forward.
Saint Gaudens are the rare coins that most often mimic the movements of gold bullion. When gold is trading up, Saints trade up, and vice versa. Saints will track gold price movements, as evidenced by the chart above, but once gold starts a significant run, Saints can significantly outperform gold prices at the same time.
Faster Price Appreciation than Gold
Diversifying 30 to 40% of your tangible assets allocation to rare coins has historically produced the highest long-term investment returns. The appeal of rare coins to investors is their impressive historical price appreciation, which has outpaced the level of the underlying precious metal. Penn State University Professor Raymond Lombra conducted an independent study on the investment performance of U.S. rare coins from January 1979 to December 2016. He found that coins rated MS-65 nearly doubled the performance return of gold over that time.
The current market conditions reveal a truly golden opportunity in investment grade gold. Another 10% move higher in gold prices could produce dramatic investment returns in Saint Gaudens. History shows that this unique undervaluation period won’t last long. Strike now while the iron is hot.
The Seven – Ten Split of Investing
Posted onThe seven-ten split is widely considered the most difficult pin arrangement in bowling. You face one pin on the far right and one pin on the far left. There are no pins in between. The bowler must commit to one and in doing so hope to knock down both. The long-term chart comparing the S&P 500 with the S&P commodity index (GSCI) is starting to resemble a seven-ten split.
Over the last ten years we’ve seen a gradual, but consistent divergence between a rising S&P 500 and a falling commodity index. A quick glance might leave one thinking that the S&P 500 is the winning bet between the two indexes. However, there’s more to the picture.
Is a rising S&P 500 representative of sound fundamentals within the underlying equities? The cyclically adjusted price to earnings ratio (CAPE) shows valuations at near record highs. In fact, the only time we’ve seen valuations at this level have been in the lead up to the Wall Street crash and the dot-com bubble. Within just the last few months the Fed released a statement explaining their view that “Broad U.S. equity price indexes increased over the inter-meeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. … Some participants viewed equity prices as quite high relative to standard valuation measures.”
In an attempt to better understand the contextual weight of these comments researchers looked at six other instances where the Fed remarked on “overvaluation” since 1996. The data was revealing. They found that “The officials’ discussion of an overvalued stock market often came before long pauses during bull markets.” This assessment gives equity investors reason to pause but what does it mean for commodity investments?
The S&P Commodity Index, which includes precious metals like gold and silver appears to represent the mirror image of the S&P 500. In this case, commodities looked undervalued and poised for a resurgence. Katusa research has seized on this finding. They offer a blunt assessment that “Relatively speaking, commodities are dirt cheap. In fact, they are the cheapest they have ever been to the share prices that make up the S&P 500.”
Cautious investors will remind themselves that this comparison is a relative measure. That is, the opportunities for commodity investments may seem less robust when compared to indexes other than the S&P 500. However, the unassailable truth remains: commodities appear to be more fundamental-driven compared to equities which occasionally follow the capriciousness of flawed investor psychology.
Fortunately, investors can have it both ways. Investing in the S&P 500 certainly, doesn’t preclude exposure to commodities. The takeaway, however, is that the data shows today’s market is offering some valuable opportunities for inexpensive commodity investments largely ignored amid the fervor surrounding the bull market in equities. Consider buttressing your portfolio with the diversification that comes from an array of asset classes.
The data illustrates that opportunities for investors are never front and center. Rather, they exist in the margins where people aren’t looking. Look closer.
Equities Drift Lower as Retail Dives
Posted onUS stocks struggled to stay above water on Friday of last week. Pressure seemed to mount from online retail giant Amazon, Inc. (AMZN) announcing an unprecedented bid to buy Whole Foods (WFM) for a whopping $13.7 billion.
The news of the merger weighed heavily on other retailers in the US, sending the entire consumer staples sector falling more than 1.1%, thereby making it the worst performer out of the S&P 500’s eleven separate sectors.
For the week, the both the Nasdaq 100 ended essentially flat, and the S&P 500 and Down Jones ended up slightly. Although stocks bounced off their early-morning lows on Friday, weakness was definitely prevalent in the market. The Dow Jones Industrial Average managed to lead the pack by making a new all-time high on Thursday.
In terms of macroeconomic news, on Wednesday of last week the Federal Reserve raised its benchmark lending rate by a quarter of a percent, as expected. The reaction in the US stock market was initially mixed, but stocks mostly finished higher after the rate hike announcement.
On the fixed income side, the yields on the 30-year US treasury bond and the 10-year US Treasury Note absolutely soared in response to the rate hike. For precious metals, however, the result was the opposite. Spot gold saw an initial spike to $1,284.20 per ounce, but then it rapidly sold-off to settle around $1,260 per troy ounce. Generally speaking, rising interest rates make it more expensive to hold and purchase assets like gold, because borrowing money becomes more expensive and gold is a non yield-bearing instrument. As such, a gold sell-off in light of an interest rate hike is not overly unusual.
Besides the FOMC announcement and weekly jobless data, traders had difficulty finding other positive signals in a batch of economic data last week. “Aside from the weekly jobless claims, the majority of the economic data released this week–inflation, retail, housing–was below expectations,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. Moderate to weak economic data seems to have facilitated the decline for stocks.
Friday of last week was also what’s known as “quadruple-witching day,” where futures, futures options, index options, and individual stock options all expired on the same day. The famous JP Morgan analyst Marko Kolanovic, who accurately predicted many turbulent market days like August 24th, 2015, noted how over $1.3 trillion worth of S&P 500 options expired on Friday. As traders closed out and rolled their positions to accommodate for the expiration, market conditions were likely altered during Friday’s trading. This also likely led to increased volatility and unusual trading activity in the market.
Looking ahead, there are a host of potentially market moving events this week. Minutes from the Bank of Japan will be released later this evening, and the Reserve Bank of New Zealand will make an announcement on Tuesday regarding its Official Cash Rate.
Moreover, traders in the US will be eyeing monthly jobless claims data as well as retail sales data in an attempt to gauge where the economy is heading. However, if economic data keeps coming in below expectations, further weakness in the equity market could easily spark a rally in safe haven assets like gold. Even with an interest rate increase, gold showed its strength and beauty as an investment by managing to close out the week above $1,250 per ounce.
Dispelling the Myth of Gold and Interest Rate Hikes
Posted onThe Federal Reserve recently approved a second interest rate hike for 2017. Additionally, they signaled plans to reduce their $4.5 trillion balance sheet. Essentially, these plans add up to a departure from the easy money policy that has reigned in recent years.
During times like this many investors question the value of precious metals as an investment. The reason: as interest rates increase other interest-bearing investments like bonds and dividend-paying stocks also raise their rates. This move increases the opportunity cost of gold. That is, allocating one dollar to gold means foregoing the opportunity to put that same dollar to work with one of these bonds or dividend stocks.
However, does the data agree with the popular sentiment that rising rates means falling gold?
In short, the answer is no. Between April and November of 2004, as the Fed repeatedly raised rates gold exhibited a similar pattern of a gradual rise. This one example serves as a reminder that conventional wisdom lacks wisdom.
The broad belief that a negative correlation exists between gold and interest rates is simply false. Case in point: from 1970 to 2015 the price of gold and interest rates experienced only a 28% correlation. Moreover, periods of surging gold prices have been characterized by similarly aggressive rate hikes. Throughout nearly all of the 1970’s, interest rates quadrupled while gold made an incredible journey from $50 an ounce to $850 an ounce.
The surprising durability of this myth is problematic for two reasons. First, it misdirects investor’s buying decisions. Second, the mere presence of the myth distracts from the clearer truth; gold prices fluctuate based on marketplace demand.
This myth is, unfortunately, likely to persist despite that on the heels of the Fed’s latest decision gold prices have risen. This jump in price stems from renewed fears about the health of the U.S. economy. Though the Fed’s move inspires some confidence, recent metrics are casting doubt on the likelihood that the Fed will approve a second hike in September. “Right now the market is doubting they’re going to be able to do a hike in September. That’s because U.S. economic data has been weak,” remarked a senior market strategist at RJO Futures.
The larger picture may portend a market correction thereby boosting demand for gold further. The easy money policy of the Fed has emboldened and empowered investors to commit more money to the equities market. Why? Because as the government purchases bonds investors migrate to investments with a greater return (albeit at a higher level of risk).
These inflows have been driving up stock prices to levels which some contend are outsized relative to the inherent value of the underlying assets. As policymakers resolve to remove this support the stock market may experience outflows causing share prices to drop. “Don’t be mesmerized by the blue skies created by central bank QE and near perpetually low-interest rates. All markets are increasingly at risk,” remarked the co-founder of Pacific Investment Management Company.
Investing often means challenging assumptions and questioning norms. As major economic policies shift revisit your preconceived notions and consider how your portfolio could be improved.
