Gold acts as a great hedge against uncertainty. With this in mind, I see at least three factors that can spook investors this year and send gold prices skyrocketing in a short time span.
Gold Prices to Jump Higher as Bonds Sell-off Continues
Over the past few months, bonds markets across the globe have faced severe headwinds. Please look at the chart of yields on the 30-year U.S. bonds below.
Chart Courtesy of StockCharts.com
Since February, the yields on the 30-day U.S. bonds have surged close to 35%. This means investors are selling long-term U.S. bonds. They now trade well above their 200-day moving average for the first time in a year. This is indicative of the long-term trend turning to the upside.
You see, thanks to the Federal Reserve, bonds markets have surged significantly and have become way too crowded. As the noise about Federal Reserve raising rates increases, more investors will re-adjust their portfolio and run away from bonds. As interest rates increase, bond prices decline. This can cause panic, and gold may provide these investors safety for the time being.
China’s Economic Slowdown Worsening
In 2014, the Chinese economy, relative to its historical average, performed poorly. This year, the hopes aren’t as high, either. Already, the People’s Bank of China has reduced its benchmark interest rates three times in the last six months. One of my colleagues at Profit Confidential, Jing Pan, has covered this in detail; see “China Lowers Interest Rates for the Third Time in Six Months.”
At the end of the day, China lowering interest rates means the central bank of the country is expecting trouble. What’s even more worrisome is that these rates are expected to decline even further.
When the second-largest economy in the world is struggling, you ought to be very careful. If you believe this won’t send waves of uncertainty, then you should think again. As the Chinese economy slows, investors may seek to park their money where they know they can find stability; gold.
Eurozone Breakup Still on the Table
Greece recently made a payment to its creditor. It’s very questionable whether it will continue to pay. With this, the prospect surrounding Greece leaving the eurozone remains on the table. If these talks continue, the future of the euro will become doubtful.
What many investors are forgetting is that if Greece is allowed to leave the eurozone, who can stop countries like Spain, Italy, and Portugal from leaving as well? These countries have much more substantial debt than Greece and are hands-down major economic hubs in the common currency region.
This phenomenon has potential to send investors in the eurozone and across the globe towards the safety of gold.
Why Should Investors Look at Gold?
As it stands, gold looks very attractive. The fundamentals are good, be it supply or demand. See “Gold Market Supply and Demand Suggests Higher Prices Ahead.”
Other factors like the one I mentioned above only make the bullish case for the precious metal more compelling. I truly believe the gold market as a whole is undervalued; be it stocks or bullion. Investors should at least give it a look. With this I also want to make it clear that I don’t preach investors holding 100% of their savings in precious metals; 10% would do the job.