Gold Is In The Midst Of A Tug Of War

The stock market is often considered the stage for the battle between the bears and the bulls; and for good reason. There’s almost always two conflicting views with regard to what an asset might do next. However, the battle between the bears and the bulls is seldom as clear as the battle surrounding gold is at the moment. The reality is that both the bulls and the bears have very valid arguments. So today, we’ll take a look at the argument from both sides in an attempt to determine which way gold is headed next. So, let’s get right to it…

The Bullish Argument On Gold

As mentioned above, I believe that both sides of the argument have very valid arguments. So, starting with the bullish argument, here are the bullet points that I find to have most merit…

• The Chinese Economy Is Struggling – First and foremost, I think that they key factor in the bullish argument is the fact that the Chinese market and economy are having an incredibly hard time. We’ve all heard about the Chinese market crash and many experts are starting to tie the knot between the crash and gold. The reality is that the Chinese stock market is one of the largest in the world. Since the market is having an incredibly hard time Chinese investors are naturally going to look for a way to keep their money safe. If you’ve researched gold as an investment, one of the first terms you likely came across is “safe haven”. The bottom line is that investors know that gold is one of the best ways to preserve the value of their money during downtrends in the market. This has led to an influx of Chinese demand for gold; ultimately causing the price of the metal to spike.
• Coming Federal Reserve Rate Hike – The US market is already sitting on high valuations; making it a risky place to be as is. However, the risk of investing in the United States market is likely to increase if the Federal Reserve does decide to start raising its interest rate by the end of the year. Most experts are expecting this to happen in September; and while I have my doubts, I can definitely see how concerns could cause an increase in demand for gold in the United States as well.
• Worldwide Economic Turmoil – Investors know that the every economy, and therefore market, is affected by worldwide economic conditions. The reality is that economies around the world are so intermittent these days that a slide in one area could cause a worldwide disaster. As a matter of fact, it would be nothing new. As a matter of fact, that was exactly the case during the 2008 and 2009 worldwide economic crisis. With that said, there are currently 23 countries around the world that are already experiencing a stock market crash! If not handled correctly, this has the potential to spin out of control; leading even more investors to run to the safe haven that is gold.

The Bearish Argument On Gold

While I have to admit that the bullish argument is incredibly convincing, I can’t discount the bearish argument either. Here are the main focal points of the bearish argument on gold…

• Chinese Crash – The bears on gold admit that the Chinese market crash is causing gold to spike; there’s no denying that. However, the bears have two arguments with the idea that this crash will have a lasting impression on gold. First and foremost, market crashes have happened throughout history. However, after the crash, bullish activity tends to follow; leading to a recovery; even if the recovery is slow. So, we can’t expect the crash to keep gold down forever. Perhaps even more convincing is the fact that the crash has prompted the Chinese government to devalue the yuan. With a lower value currency, demand for gold will almost surely decline over time.
• Federal Reserve Rate Hike – There is no arguing the fact that a rate hike from the Federal Reserve would cause a spike in the value of gold. However, there is a valid argument for the idea that the Fed will raise interest rates in September. The reality is that the United States economy is starting to do well. However, it may not be doing well enough to sustain a rate hike. With economic turmoil around the world that will almost certainly bleed into the United States economy as well as poor economic reports like this one coming out of the United States at the moment, it’s hard to believe that the Federal Reserve would be as naive as to not consider the consequences of raising the rate. As a matter of fact, the members of the Fed are currently torn as to what the best move to make would be at the moment. If the Federal Reserve doesn’t increase its rate, chances are gold will be met with resistance as US investors will remain comfortable in the market.
• Goldilocks Economic Activity – Finally, the bears argue that the US economy is in a bit of a Goldilocks zone for investors. Conditions aren’t positive enough to cause a rate hike, but are positive enough to keep growth going. This also causes the USD to maintain strength. Because gold is valued in the USD, the commodity becomes more expensive in nations outside of the United States; which is also likely to weigh heavy on demand.

So, Which Side Is Right?

This is one of the rare cases where I’m simply not comfortable saying that the asset will rise or fall. As I mentioned from the beginning, both the bulls and the bears have very valid arguments. I will say that I am with the bears in the sense that I don’t believe that the Federal Reserve is likely to raise interest rates by the end of the year. There’s simply too much going on that could turn that into a bad idea. However, with economic struggles around the world, I can also see the gold market finding support and even rising. With that said, I’m simply torn between the two in this ultimate tug of war between the bears and the bulls. One thing I can say however, is that this is definitely going to be interesting.