With central banks gearing up to restart the proverbial money printing presses in announcements this week, investors have a new game. They are now busily front running central banks’ action in markets everywhere. This emerging news makes an even stronger case for investing in gold and the precious metals as significant inflation is sure to be the final destination of this money printing and asset buying party train.
The Latest News from Central Banks
It only took a few hours on Monday morning after Prime Minister Abe of Japan announced he would soon begin a new round of economic stimulus in the amount of another $100 billion. The latest revelation of massive quantitative easing pushed safe haven money from the Yen around the world into stock markets early Monday. With fears dissipating over Brexit and this now free-flowing capital seeking a new risk-on home, the S&P 500 notched another record high early this week, its first in 14 months. U.S. markets needed only a few hours to decide that if Japan were pursuing yet another stimulus package, then American policymakers probably will as well. For sure American interest rate tightening is not in the cards any time soon. Even with the better than anticipated United States’ jobs report for June that emerged last Friday, there is simply too much instability economically around the world now for the Fed to make good on its fading promises to raise the interest rates in the coming months.
Europe is also now widely expected to print more money to save the economies and banks of Italy and Greece along with other troubled Eurozone members. The International Monetary Fund underscored the risks for Italy with its recent report on the country stating: “Risks are tilted to the downside, including from financial market volatility, the refugee surge, and headwinds from the slowdown in global trade.” Just Monday the news came out that Italian industrial production demonstrated an unexpected slump for May, contracting by .6% for the month after it grew .4% in April, per the Italian statistics office. This industrial production movement in the wrong direction comes at the same time as a number of Italian banks are near the troubling stages of requiring major bailouts. Meanwhile across the English Channel, the Bank of England is preparing to cut interest rates for the first time in seven years. They are widely expected to slash rates from the present .5% rate to an all time low of .25% in an effort to prop up the now struggling post-Brexit leave vote British economy.
The Reason Gold Has Pulled Back
Despite all of the troubling global economic signs, gold and silver have pulled back around 1.5% so far this week. The important thing to remember is that nothing has changed in the fundamentals supporting the precious metals. The reason for the minor sell off is simple. Money which had found a temporary home sheltering from Brexit and other EU issues in gold has been pulled out. Open interest made this clear at the end of last week. It makes sense that as the fears of global contagion from Brexit subside (for now) that the money which caused gold to pop the last few weeks would move on to riskier enterprises like stocks. Gold is often treated as this safe haven destination, but the truth remains that it is money that can not be printed. It functions as a counterweight to inflation.
The Right Reasons to Buy Gold Now Have Not Changed
The proper reasons to add gold to your holdings and investment portfolio have not changed despite the renewed risk on attitude running rampant around the world at the moment. Retail investors know this, as they have driven inflows into the gold backed ETFs to their greatest levels since 2009 during the depths of the financial crisis and Great Recession. These investors have not been fooled by the relaxing headlines, instead understanding that there is the mounting potential for another financial crisis in the offing.
The renewed money printing and fiscal stimulus that has started this week is a prime reason to acquire precious metals on every pullback. Bond yields are at all time lows. Rating agency Fitch recently pointed out that $11 trillion worth of sovereign debt is now paying negative interest rates and below zero yields. Between low bond yields, anemic global growth, and still wildly swinging currency markets, the precious metals continue to attract sensible investors. With no real alternative for a safe place to preserve your wealth, gold continues to play this role it always has.
Of course the ultimate reason for purchasing gold in these times remains the central bank actions of debasing their paper money currencies. Gold also provides the ultimate hedge against inflation in any time and place. There may not be any inflation rearing its ugly head at the moment, but there is plenty of currency debasing in the works. Now is the time add to your gold and precious metals positions, while they are momentarily on sale. Veteran gold analysts like Gary Wagner remain bullish on the complex and expect gold will rally to as high as $1,445 per ounce during the coming three months. It will be late to climb aboard the precious metals freight train then.