Did you buy gold at the end of 2015? If you did, you are feeling pretty good now aren't you. Gold surged over 19% since the year started, while the S&P 500 plunged about 9% year-to-date. The latest upswing in the gold market underscores what long-term gold investors have known all along: gold remains the safe-haven investment that the world turns to in times of crisis, panic, economic fears and market crashes.
Long-term gold investors are a patient bunch. They know that market cycles repeat: fear, greed, panics, and crashes. Markets are driven by human emotion, which become self-perpetuating cycles that occur over and over again. Through it all, gold is always there for the savvy investors. A safe haven, a store of wealth, a hard asset whose price isn't manipulated by governments or central banks.
Friday's losses? Don't give it a second thought. Chalk that up to short-term momentum traders are taking some profits off the table. Remember there are many participants in a market and everyone has different time horizons, including long-term investors and short-term traders. The short-term trading crowd just booked some profits. Can you blame them?
Where do we go from here? Looking into 2016, the economic horizon becomes murkier with every passing day. Risks of a global recession are rising. Societe Generale now estimates that risks of a synchronized global recession has jumped to 20%, up from 10% back in December. Forecasts are changing, fears are spiking and for now this creates a fertile environment for gold to continue to rally.
Let's take a look at what's changed in a very short period of time:
1) U.S. growth forecasts continue to move lower. Wells Fargo projects even slower growth in the U.S. this year, down from an already sluggish and below-historical trend levels of 2.4% in 2015. "Our full year 2016 U.S. GDP call is now 1.8 percent, down from 1.9 percent in the previous forecast and down from 2.4 percent we believed would have unfolded when we presented our annual outlook back in December," says Sam Bullard Managing Director and Senior Economist at Wells Fargo Securities.
2) Expectations for Fed rates have been slashed. BNP Paribas revised their call for Fed rate hikes this year to zero. "The Fed has gotten locked out at a lower fed funds rate than we had expected. Slowing growth in H2 2016, the result of the fallout from market volatility and slower real income growth will likely keep the Fed locked out, even if markets calm down relatively soon. Therefore, we have no rate hikes in our central forecast for 2016 or 2017," according to BNP analysts.
3) Negative interest rates have unintended and negative consequences. The negative interest rate environment continues to dominate global central bank policy and is even being discussed at the U.S. Federal Reserve, which is a sign of severe economic malaise. Central bankers don't have a lot of options—and even if negative interest rates aren't helping, they simply don't have a lot of ammunition left in their holster.
Sweden announced a fresh interest rate cut this past week, tugging its rates even deeper into negative territory. Almost a quarter of the world's GDP stems from economies which have negative interest rates, including Sweden, Japan, the Eurozone, Denmark and Switzerland.
Negative interest rates fuels fear, in addition to actually adding more financial pressure on already struggling banks. "Perhaps the biggest worry though is that cuts to policy rates have added to the sense that the world economy is slowing sharply and that policymakers are running out of options," wrote economists at Capital Economics in a Global Economics Update research note.
In a tangible way, negative interest rates increases costs to banks, which further impedes their profit levels and could weigh on their willingness to issue fresh loans.
Bottom line: Gold is an attractive alternative to cash.
Negative interest rates hurt savers, while gold investors can benefit from price appreciation, or capital preservation as fiat money loses value.
Cash is a position. But, gold may be a better one.
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