Last week, gold prices got a lot of attention as they enjoyed their largest increase last week since 2016.
What drove this sudden burst of interest in gold?
“Volatility in the equity markets really has people looking at alternative assets that can hold their value in times of market turmoil,” said Chris Gaffney, president of EverBank World Markets.
“[Overseas,] we are seeing a burgeoning middle class and more disposable income in India and China, which should lead to more physical demand,” he added.
“We think that it is a good time to own precious metals,” Gaffney said.
As a time-tested hedge for inflation and rollercoaster markets, gold seems to be living up to expectations.
INFLATION + MARKET VOLATILITY = INVESTOR HEARTBURN
Last week, economists were surprised to see the Consumer Price Index – which measures the prices of everyday items every family needs — rising up 0.5% in January, beating their expectations.
According to the Labor Department, if you take away price changes for a few volatile categories like food and energy, U.S. CPI saw the largest monthly increase since 2005!
The Federal Reserve is trying to unwind carefully from a decade of staggering monetary expansion. It may not be able to get ahead of the inflation train.
CFRA strategist Lindsey Bell says “ultimately the Fed has reason to be measured with interest-rate increases, which will work in gold’s favor.”
Bell is clear about her view on precious metals right now.
“Gold is a smart and defensive way to diversify a portfolio in the later innings of a bull market and ahead of what has historically been a volatile year as mid-term elections approach.”
The Federal Reserve has to pull every lever precisely to avoid cutting off the U.S. economy just when it is booming. If it acts too slowly, inflation can strike hard!
Incrementum fund manager Ronald-Peter Stoeferle says the Fed could be reluctant to increase interest rates more than three times this year, which could put the central bank behind the inflation curve.
A weak U.S. dollar can also contribute to inflation through higher import costs. The U.S. trade deficit widened to a nine-year high in 2017 in line with rising consumer spending. In January, housing starts rose to an annual rate of 1.33 million. This is higher than the 1.24 million forecast from surveyed economists.
That sounds like the start of higher prices.
CONSIDER ALL THE FACTORS
If you think higher stock market volatility and a weak dollar are a possibility in the year ahead, you could be right. But you must also consider inflation.
Accelerating inflation could provide a lift for precious metals because investors have long considered it a hedge against inflation and safe haven in turbulent times.
Inflation can rob you of the fruits of a lifetime of labor if you don’t act to blunt its effects!
The time to act before inflation really heats up is now.
For many people, owning physical gold and silver is a sensible part of a well-diversified retirement portfolio. There is no price you can place on having the peace of mind to sleep well at night, come what may.
