“All that glitters is gold” was one of the most common headlines for Gold back in 2011-2012 as the metal was heading towards its all-time high. Since then, however, Gold hasn’t exactly been glittering, nor has it been shining or even twinkling. Simply put, the last two years have been brutal for the metal. With the Fed terminating its Quantitative Easing program (the reason Gold began to rise in the first place) and now moving closer towards a rate hike, investors have been quick to flee their positions and leave the metal to melt down all the way from $1,920 an ounce to as low as $1,130.
However, over the past few weeks, just as the Fed seems ever closer to raising rates, behind the curtains and with very little fanfare, a buildup for Gold’s comeback in 2015 might be in the making. Why, of all times, is Gold’s glitter returning now? This is what we’re here to find out.
Gold Loves Uncertainty
We all know about Gold’s benefits: it is a safe haven investment and a good one to buy when it seems the world might spin right off its axis. Whenever currencies collapse, and the future seems unsure, investors turn to Gold. On the other hand, Gold’s weak spot is that it does not pay interest. Unlike other reserve assets such as bonds or even stocks, Gold pays you nothing to hold it, which means that when things are going well and interest rates are rising, it is not exactly worth holding. So in short, Gold prices thrive in times of uncertainty and volatility.
Oil Busts, the Ruble Collapses and Gold Booms?
So how is it possible that, while the Fed is getting closer to raising rates, Gold finds itself under renewed interest? There are two major reasons which happen to be interconnected. The first and foremost of these is the plummeting Oil prices. Seemingly, falling Oil prices should lower inflation and therefore also lower the allure of Gold, however this time around the fall of Oil prices has created ripples of destruction all over the global marketplace.
The collapse of Russia’s Oil-dependent economy and the major devaluation of the Ruble as a result, have ignited a broad currency crisis in emerging markets. And, in emerging markets where currency crises are relatively common, stocking up on Gold has always been the natural response. In fact, China and India are the world’s largest markets for physical gold, illustrating just how even fear of a crisis can propel global demand very quickly, especially in India where the Rupee took a nose dive in the past year.
But there’s more. While emerging markets may feel the sword of a currency crisis at their proverbial throats, other markets around the globe have shifted to massive easing. With the BOJ embarking on an unprecedented scale of money printing (QE) and the ECB about to increase its balance sheet by more than €500 billion, the risk of inflation is high, and so is the appeal of the Gold bullion. With the exception of the US, the world is printing money hand over fist, and the uncertainty and volatility that this trend creates are fertile ground for a big Gold comeback.
A Glimpse at the Charts
A glimpse at the Gold chart draws a very simple yet interesting picture. As you can see, Gold in enjoying support between $1,130 and $1,170 an ounce, which magically correspond with a long term rising trend, suggesting a fair chance of a rebound.
How high can Gold rebound? That depends on how optimistic you are on Gold or how pessimistic you are on the global economy, the Ruble and Oil. If you are pessimistic on Oil, i.e. you expect oil prices to continue their downward slide, then perhaps the $1,400 level, or 14.9% higher from where we are currently, could be a reasonable expectation for Gold. Comeback or not, behind the curtains, it seems that Gold is set to conjure up a bit of unexpected drama.