In a January post, I showed how the price of gold rallied in the months following the 2015 and 2016 December interest rate hikes – as much as 29 percent in the former cycle, 17.8 percent in the latter.
Gold ended 2017 up double digits, despite pressure from skyrocketing stocks and massive cryptocurrency speculation.
I forecast then that we could see another “Fed rally” this year following the rate hike in December 2017. Hypothetically, if gold took a similar trajectory as the past two cycles, its price could climb as high as $1,500 this year.
As I told Kitco News’ Daniela Cambone last week, I stand by the $1,500 forecast. Before last week, investors might have been slightly disappointed by gold’s mostly sideways performance so far this year. But now, in response to a number of factors, it’s up close to 3 percent in 2018, compared to the S&P 500 Index, down 2.4 percent.
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Living With Volatility
While I’m on the topic of equities, the S&P 500 dividend yield, for the first time in nearly a decade, is now below the yield on the two-year Treasury. Historically, the economy has slowed around six months after dividends stopped paying as much as short-dated government paper. This could spur some stock investors to trim their exposure and rotate into other asset classes, including not just bonds but also precious metals, which I believe might help gold revisit resistance from its 2016 high of $1,374 an ounce.
Volatility has also crept back into markets. It began with the positive wage growth report in February, implying the possibility of faster inflation. More recently, the CBOE Volatility Index (VIX), or “fear gauge,” has surged on the departures of Gary Cohn as chief economic advisor and Rex Tillerson as secretary of state, as well as the application of tariffs on steel and aluminum imports. Last week, President Donald Trump ordered tariffs on at least $50 billion of Chinese goods, stoking new fears of a U.S.-China trade war. In response, the Asian giant proposed fresh duties on as much as $3 billion of U.S. products, including wine, fruits, nuts, ethanol and steel pipes.
As I see it, there could be other contributing factors pushing up the price of gold. A good place to start is with Trump’s recent appointment of former CNBC star Larry Kudlow as White House chief economic advisor.
Kudlow’s Kerfuffle Over Gold
Between 2001 and 2007, I appeared on Kudlow’s various CNBC shows a number of times, and though he always struck me as highly intelligent, informed and accomplished–he served as Bear Stearns’ chief economist and even advised President Ronald Reagan–it was clear he had a strong bias against gold. This was the case even as the price of the yellow metal was on a tear, rising from $270 in 2001 to more than $830 an ounce by the end of 2007.
Kudlow showed his true colors toward gold as recently as this month, telling viewers: "I would buy King Dollar and I would sell gold." As you can see below, this hasn’t been a prudent trade for more than a year, now.
Earlier this month, Kudlow wrote that falling gold is good, as it “bodes well for the future economy.” He said he agreed with a friend, who called the metal an “end-of-the-world insurance contract.”
While there are those who would agree with him, it’s important to remember that gold is used for much more than as a portfolio diversifier, and its price is driven by a number of factors. These include Fear Trade factors, from inflation to negative real interest rates, and Love Trade factors such as gift-giving during cultural and religious festivals. The precious metal has important industrial applications as well.
And since I first went on Kudlow’s program, gold has outperformed the S&P 500’s price action nearly two-to-one, as I showed you back in December. Even with dividends reinvested, the market is still trailing the yellow metal.
So it’s fine if gold isn’t your favorite asset, but to dismiss it wholesale as Kudlow has again and again is, with all due respect, irrational.
By Frank Holmes
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