Gold Prices to Skyrocket as Global Uncertainty Rises?
Gold prices go up when uncertainty rises. As it stands, there’s an abundance of it in the global economy.
There are at least three major issues that are haunting investors globally; economic slowdown in China, threat or outright currency devaluation in the emerging markets, and the U.S. dollar rising as the Federal Reserve contemplates hiking its benchmark interest rates.
Rising Uncertainty Great for Gold Prices
To provide some perspective, please look at the weekly chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). It is also referred to as the “fear index.”
Chart courtesy of www.StockCharts.com
The VIX has spiked to the highest level since 2011 in matter of a few weeks. If anything, the fear index is telling that investors are outright scared and fully expect more volatility ahead. At the very core, this is great for gold.
Fortunately, this isn’t all.
We see that investors are fleeing risky assets. Please look at another chart below. It plots the National Association of Active Investment Managers (NAAIM) Exposure Index. This tracks the percentage of U.S. stocks active money managers hold in their portfolios.
Chart courtesy of www.StockCharts.com
Active money managers have been cutting their exposure from stocks very quickly. In just February of this year, 100% of their portfolios consisted of stocks. Now, equities make up just 40% of their portfolio. In other words, their exposure to stocks has declined by roughly 60%. This says money managers are hesitant to hold such risky assets.
Retail investors are jumping ship as well. Interesting enough; they are selling bonds along with stocks.
According to the Investment Company Institute (ICI), looking at the weekly data, since the beginning of July until mid-August, outflows from the long-term stock mutual funds amounted to over $10.5 billion. Outflows from bond mutual funds amounted to $15.9 billion. (Source: Investment Company Institute, last accessed August 25, 2015.)
With this selling, will investors rush towards safe havens like gold?
As Goes Sentiment, Investors Rush Towards Gold
Here’s what must be understood; when sentiment across the board is bleak, investors usually don’t rush towards the yellow metal all of a sudden. From previous crashes and panic situations, we see a slight delayed reaction.
For example, back in February and March of 2009, when the stock markets were making their lows; gold prices declined slightly as well. A few months later, they started to soar, and then eventually moved on to their highs back in 2011.
What to Expect Going Forward
Lets face it; gold hasn’t been an investor favorite for the past few years. The yellow metal has gotten a reputation of a “declining asset.” As this uncertainty and the volatility in the global economy continues, don’t rule out investors trusting the yellow metal once again and rushing towards it.
I have been optimistic towards gold and believe that the metal continues to set up for massive rewards. With the recent havoc in the markets, investors should be paying attention to well-funded and well-run mining companies. They can provide leveraged returns once the gold market turns.
Also Read:
Gold Slump to End in 2015: Prices to Skyrocket in 2016?
Gold Prices to Skyrocket Due to Greek and Chinese Economic Struggles
