E Buy When Others Are Selling, And Be Patient

Gold’s recent collapse has triggered some questions as to the cause of the weakness more fundamental that the extraordinary dumping of gold last Sunday night just as Shanghai was opening. That selling triggered a rout that has taken gold under $1,100, to six year lows. Six major reasons can be provided, with different time-frames and differing importance.

1.  An improving U.S. economy raising the prospect of an interest rate hike this year. Though the Federal Reserve may well raise the Fed Funds rate this year, I doubt this would signal the start of a rapid series of rate increases (as is often the case when the Fed turns); Janet Yellen emphasized as much herself, talking of a "gradual" return to "normalcy". Moreover, a quarter point hike in the rate is surely just about the most telegraphed rate hike in history, so should be fully discount in the gold price.

2.   Related to this is a reasonably strong stock market, making the need (or perceived need) for gold as insurance less than in the past. Typically, investors look to hedge their stock market exposure with gold when they are concerned about the stock market. We look at the present situation differently. The stock market it getting more and more into overvalued territory with the risk of a correction increasing.

The dollar is strong amid an improving economy and rising stock market

3.  The dollar has recovered from its earlier correction and has resumed its upward march. The dollar has benefited from the safe haven concern, first over Greece and then over the Chinese stock market. This, I feel, is perhaps the most important factor affecting gold right now, particularly against the background of a reasonably healthy economy and stock market. Gold likely won’t recover meaningfully until the dollar peaks.

4.  Lessening global concerns, following the Greek deal and Iran nuclear agreement. Whether these crises have faded permanently is a different question of course.

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Carol W 5 years ago Contributor's comment

so which gold stocks are you buying? would be nice if you mentioned your watch list..thanks

Adrian Day 5 years ago Author's comment

That will be a future article. I did post the other day to buy Osisko. Will have others ahead.