All That Glitters is GoldAll That Glitters is Gold

Fundamental Forecast for Gold: Bullish

This title is a line taken from Shakespeare. He actually said ‘all that glisters is not gold,’ but ‘glisters’ was the word for ‘glitters’ in the 17th century, so the saying has held while the English language has evolved. But this line is relevant to the Gold market right now: The line was in reference to the fact that not everything that appears great turns out to be that way. As humans, we get excited and we have a tendency to overvalue things. We’re riddled with observation biases that make us think that the success of today will most likely happen tomorrow. But this is incorrect, right, because if history always predicted the future then nothing ‘new’ would ever happen.

Instead of looking at the past to merely allude to what may happen, we can use the events of the past combined with relevant price movements in order to see what’s driving a market and what may happen in the future when we plan for various scenarios that might actually take place.

That’s what makes Gold so utterly exciting right now. Recent price action has been extremely bullish, and that can be helpful for picking a continued up-side bias; but it’s the reasons for Gold’s recent rise of bullishness that make the prospect of further top-side moves enticing.

There are only so many places in this world for capital to flow. Under the mattress isn’t a very relevant option, and most Central Banks around the world are actively embarking on policies designed to deflect capital flows. Europe has been on negative rates for nearly two years now, and Japan made the move to negative rates last month. This made the US Dollar an operable candidate for capital flows. If a bank held reserves at the Central Bank in Europe or Japan, it was a very logical decision to just direct that cash to American branches in order to place it on deposit at the Fed. As the Fed was looking at higher rates while also being one of the few major central banks actually paying interest, this drove considerable capital into the Dollar.

There is only one problem: That additional strength being seen in the Dollar became a threat to exporters, and this exposed the risk that additional pressure on exports would pull the United States economy into recession as well. Mr. William Dudley of the New York Fed mentioned as much in January, and this was largely taken as a dovish signal that the Fed would back off of rate hikes in order to stem capital flows to protect exporters. But it was Ms. Yellen’s testimony in front of Congress three weeks ago that really seemed to turn matters, and markets construed her stance as being extremely dovish, pricing out rate hikes for the remainder of the year out of the Fed.

Is the Fed done with rate hikes for this year? Likely not, or at the very least it’s far too early to predict June or September’s rate decision as we’ve just entered March; but what we do know is the pattern that we’ve seen for the past six years appears ready to continue. Central Bankers are likely going to try to continue offsetting economic (and stock market) weakness with even more loose monetary policy.

This is why Gold has been on such a magnanimous run, and this is why the yellow metal has been one of the most attractive assets on the Planet Earth as its run higher by 18.7% so far in 2016. This is also why the run may continue…

On the news front, we hear from the Big Three Central Banks over the next two weeks, and each of these could be ammunition for a deeper Gold move: ECB is next week followed by the Bank of Japan and then the Fed in the week after. ECB should be particularly interesting as it’s widely expected that we’re going to get something from the European Central Bank, either a deposit rate cut or an increase to QE (or perhaps even both). This could be even more strength behind Gold as deeper negative rates in Europe spurn even more capital flight and, again, there aren’t many great options not named ‘gold’ for that capital right now.

The week after is a little more questionable. The Bank of Japan will likely be reticent after the brutal market reaction to their stealth move to negative rates, and the Federal Reserve meeting is a giant question mark as expectations have moved so incredibly low for the bank to actually continue acting. This could be a situation where even the slightest nod of hawkishness from the Fed creates reversals as it becomes obvious that the Fed isn’t yet done with 2016 rate hikes. Remember the ‘hawkish hold’ of September? The Fed didn’t move rates, but warned that they might in the future: Markets sold off anyways and Gold caught a strong bid.

Conclusion: We’re in an environment that’s been on emergency-like policy for going on six years now. The simple removal of a bit of that emergency policy created risk aversion around the world that brought on questions of a globalized-coordinated recession. Sure, stock prices are still elevated, but how confident should one feel being invested in equities right now? Bond yields are pitifully low after six years of ZIRP, and any duration taken on will get absolutely crushed in a rising rate environment. And most Central Banks are actively looking to deflect capital flows. So where is an investor to go?

All that glitters, at least for right now, is Gold.