Tuesday April 5, 2016 - 12:55:50 GMT
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Gold Enters a Two-Way Street after Best Quarter in 30 Years
Gold occupies an important position as a store of economic value that transcends national boundaries. The inherent value of gold has survived through the middle ages when it was the reason behind countless number of wars and feudal conflicts, and up until now, gold is still valuable. One of the factors that makes gold valuable is that it it provides more security than other asset classes.
Gold is non-biodegradable, it has valuable industrial applications, it doesn’t rust, and it exists in a finite supply within the earth's crust. Many people have found it smarter to save their wealth in gold because gold is portable and can be easily moves across borders without raising warning flags. The best part is that gold is liquid enough to be converted into cash in any part of the world without unnecessarily long paper work.
Gold bulls are soaring
2016 started out as the year of rewards for gold bulls that have remained committed to the yellow metal through thick and thin. In the year-to-date period, gold has rewarded investors with about 16% in gains. In contrast, stocks have been facing strong headwinds and equities have only started to see meager gains in the last couple of weeks. For Instance, while gold boasts more than 16% YTD gains, the S&P 500 is up a negligible 1.09%, the Dow Jones Industrial is up 1.79% and NASDAQ Composite is down a massive 2.31%.
In March, gold had its best quarter in 30 years and the yellow metal has snagged the title of the best-performing commodity in the market. This year, gold climbed to a 10-month high with gains that outperforms the return from stocks, treasury bonds, and other commodities. Adrian Ash, head of research at gold trading firm BullionVault notes "gold tends to do well when other sectors don’t perform… Money managers are buying gold purely because it isn’t anything else - it isn’t debt, it isn’t equity, and it certainly isn’t cash. Gold is a form of financial insurance.”
Strong economic data weighs gold down
Gold usually soars during periods of market uncertainty because investors often seek out the safe-haven status of gold and an increase in the demand for gold naturally leads to an increase in its price. However, the reverse might be the case when the economy seems to be having a smooth sail and investors pull out their investment from gold into income-paying assets such as stocks and bonds.
About two weeks ago, some U.S. Federal Reserve policymakers started to give hints about their support for an increase in interest rates because it appears that the economic outlook is improving. Last week, a number of economic data were released – the content of the economic data suggests an improvement in the economy.
Last Friday, the Bureau of Labor Statistics reported the March jobs number and the jobs number revealed that U.S. employers are confident enough in the economic prospects of the country. It was reported that U.S. employers added 215,000 jobs in March to beat the consensus economists' estimate of 205,000 jobs. More so, the February jobs number was revised upwards from 242,000 to 245,000.
Following the strong jobs number, gold started seeing capital flight and the yellow metal was down in the red yesterday. Spot gold lost 0.5% to $1,216.10 and gold for June delivery lost 0.3% to $1,219 per ounce during the session on Monday.
Where is the bullion headed?
Strong economic data suggest that the U.S. economy is growing, growth in the U.S. economy would encourage the feds to raise interest rates, and many gold investors think that an increase in interest rates will be bad for gold. However, it is a little too early to draw conclusions about the fate of gold because the market is dynamic and U.S. economic data is not the only variable that determines the price of gold.
The demand for gold is still healthy even though the precious metal has dropped some gains in recent times. Maria Smirnova, a portfolio manager at Sprott Asset Management notes that both gold and equities have bright prospects ahead. In her words, "investment demand is there on the bullion end and obviously on the equity end as well". She went on to say, “there’s a sea change going on around the world with the realizations that the monetary policies have not been as effective as central banks had hoped. We don’t see inflation. Rates are declining. That’s positive for gold right now.”
However, another analyst Rob Haworth, senior investment strategist at U.S. Bank Wealth Management begs to differ. He says, gold has had its recent rally because of speculations but the speculation is nearing a peak. In his words, “As I look forward, the odds of a Fed rate increase are probably higher than where the market has them priced right now. That’s going to be a real headwind here for gold.”
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