Now Is the Time to Face Reality and Invest in Gold
The Fed’s quarter-point interest rate rise was seen as a vote of confidence in the economy. Though the increase is tiny, it was the Fed’s projection for three more rate hikes in 2017 that moved markets higher.
Higher rates also mean the cost of holding gold is higher, because it earns no yield. Long term, though, higher rates could be positive for gold, and fiscal stimulus—also on the cards—could be positive for the yellow metal.
If rates continue to rise, it would boost the cost of funding Trump’s proposed $500 billion infrastructure package. Given that markets have already moved based on this, if it failed to happen, it could be negative. It would also pass the growth-baton back to monetary policy. Unconventional monetary policy alone cannot spur meaningful growth.
In 1912, J.P. Morgan said, “Money is gold and nothing else.” In 2017, the reasons to own gold are as strong as ever. Gold is the only financial asset that is not also someone else’s liability, a good quality to have when total liabilities in the US are more than 3.5 times GDP.
The belief that the federal government couldn’t fund its (then) $15 trillion in liabilities helped gold skyrocket in 2011. That concern is even more valid today, yet the gold price has fallen. Over the last five years, gold investors have learned that what is inevitable is not necessarily imminent.
The reasoning behind gold’s latest decline rests on a shaky foundation of assumptions. If things don’t go according to plan, it could create uncertainty, and that will benefit gold.
At $1,140 per ounce, gold has a lot of potential upside. However, given the strong economic position the US enjoys relative to the rest of the world, US assets are also poised to do well in 2017. So gold should be used as a diversification tool, making up a portion of an investor’s portfolio.