U.S. monetary policy rates hikes are coming. Whether it turns out to be one rate or two rate hikes in 2015 the Federal Reserve will feel pressure to deliver on its widely broadcast monetary policy changes this year.
For long term gold investors the timing of the Fed‘s first rate hike doesn’t really matter. It’s coming. But, easy Fed policy isn’t the only bullish game in town for gold. There is a lot of bullish fodder floating around the gold markets these days that will have longer term implications for gold.
Are Gold Reserves Running Out? Notably, there is the widely talked about Goldman Sachs report in which European metals and mining analyst Eugene King estimated there is only 20 years of known mineable gold reserves remaining.
Huge Asian Demand. Then there was the recent Australian ANZ research report which forecast a run to new all-time highs in gold in the years ahead driven in large part by huge demand from Chinese consumers, along with rising demand from central banks and institutional managers looking for safety in an uncertain world.
Individuals Buying Gold. The U.S. Mint announced a huge 151.4% jump in American Gold Eagle sales during the month of March over the previous month. Sales totaled 46,500 ounces in March up from 18,500 ounces in February.
The US Stock Bull Is Six Years Old. Last but not least is the age of the current bull market in U.S. stocks. The S&P 500 has been climbing higher since the March 2009 low. For much of that time, gold has rallied alongside stocks. Gold was driven higher by a multitude of factors including safe-haven buying during the global financial crisis of 2008, massive quantitative easing policies by the Federal Reserve which jacked up the Fed’s balance sheet from $850 billion prior to the crisis to a record size over $4 trillion.
The unprecedented nature of the global financial crisis which took the entire financial system to the brink, along with the subsequent extraordinary actions by the Federal Reserve and other global central bankers to flood the system with easy money policies, broke a traditional relationship between gold and stocks.
Historically—the 1970’s is an example when investors preferred commodities or hard assets over stocks and bonds or paper assets—the typical relationship is for gold to trend in the opposite direction from stocks as investors seek alternative assets and safe havens during major bear markets.
The unprecedented nature of the 2008-2009 crisis and its aftermath saw the traditional gold-stock relationship unhinge. But, what’s next? The current run in U.S. stocks is getting old. The Fed is going to begin pull away the punch bowl at some point this year. If the stock bull turns into a stock bear, investors will gravitate toward gold as a traditional safe-haven and alternative hard asset as paper assets decline in value.
With concerns about the amount of gold reserves, expectations for huge Asian demand around the corner and a U.S. stock market that is vulnerable for a turn, gold could be looking relatively cheap now compared to what could lie ahead.
Gold has tumbled from its highs in recent years, but physical buyers continue to support gold on dips. Good demand for gold has been seen in the $1,130-$1,140 per ounce zone.