Irrespective of your investing acumen and experience, you can never forget one critical lesson: the markets have their own logic. That’s how I explain the circumstances surrounding the gold bullion sector.
Despite every headwind that would ordinarily push investors to traditional safe-haven assets, gold prices remain unusually and uncharacteristically deflated. Such deflation made some sense during the last bear market cycle, when the risk-off trade encouraged investors to pile into equities.
Furthermore, the U.S. dollar index at that time started to rise. This was further evidenced when the Japanese Yen began to shed strength, which was the desired impact that the Bank of Japan was seeking.
That was then. Today, gold prices ought to be moving higher, much higher if you ask me.
Think of all the circumstances occurring around us. Essentially, we renewed our cold war with Russia. We have a hot war in Syria. We’re about to engage in a vicious trade war with China unless cooler heads prevail. And of course, we have the perennial pain in the rear in North Korea.
On top of all these things, we have President Trump. Please don’t get me wrong – in this instance, I’m neither saying good nor bad about our current presidential administration. However, we can all agree that Trump doesn’t have the personality that would be suitable for a non-confrontational resolution.
Perhaps the Trump way of “negotiating from strength” (however that’s interpreted) will work. But the reality is that most investors are deeply concerned about the confluence of heightened geopolitical tensions and a politically unproven President. Gold bullion as a simple hedge just makes sense.
But apparently, to the markets, such a concept makes no sense at all. Unbelievably, gold prices are down 1.2% year-to-date. This despite the dollar index tanking since Trump took office, and only until recently did this circumstance improve.
Another perplexing factor is the Iran nuclear deal, which Trump pulled out of. That move really wasn’t a surprise given how the President was cantankerous on this issue. Yet this adds one more contentious cog to the geopolitical puzzle. Oil prices jumped on the news, but the market value for gold bullion actually dropped lower.
I don’t want to get into the gold bullion manipulation argument at this juncture. There’s plenty of literature to consume if you want to learn more about the subject. What I’m here to say is that this illogical situation can’t last.
Sure, as I mentioned at the top, the markets have their own logic. But the biggest law of all is the free market. At a certain point, organic demand will drive into the gold bullion market, and we’ll eventually see a price recovery.