Gold Is Finally Picking Up Again

Gold is up 15% in the past 6 weeks while stocks continue to struggle

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Feb 17, 2016
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Gold investors are having a good time. Prices approached $1,260 an ounce last week; that's up around $175 since January. There are several reasons for this: Worsening global growth prospects, the low price of oil, expectations that there won't be any U.S. interest rate hike soon and increasing recession fear all around the globe.

The price of $1,260 an ounce marks a 12-month high; gold prices have been rising around 15% in the past six weeks. Mining stocks are doing great as well. The Gold Trust SPDR (GLD, Financial) gained more than 17% this year. In comparison, the Dow Jones Industrial Average is down 8.3% for the year.

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Investors are worried about global growth prospects, government debt, low oil prices and U.S. interest rates.

The surge in gold prices was caused by a turbulence in stocks last week, with the Standard & Poor's 500 losing on five consecutive days until Friday. Gold prices went up significantly on Thursday when stock prices came down all around the world. The Euro Stoxx 600 was down 4%, and Hong Kong's Hang Seng Index lost 4% as well. Nonetheless, the stock market has experienced resurgence in the last few days, but it remains to be seen whether or not it's another sucker rally.

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However, it's not only the stock markets that are causing investors headaches. Bond yields in several EU countries have also risen over the past few weeks because investors are increasingly concerned about sovereign debt levels in Europe. As a result, rising insecurity has led to more safe-haven buying.

Additionally, investors are worried about the low price of oil. Crude oil was trading below $27 last Thursday. It seems as if investors are not sure if such a low price of oil will have positive or negative effects on the global economy. And while Russia, Venezuela, Qatar and Saudi Arabia recently signed agreements to freeze production at January levels, it remains to be seen whether this will continue to boost crude oil and Brent prices. The recent resurgence is now being tested.

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Moreover, Fed Chairwoman Janet Yellen made statements in front of the U.S. Congress last week that contributed to the view that the central bank won't increase interest rates in March. Higher interest rates would weigh on the gold price because other asset classes would become relatively more attractive.

Fed officials are particularly concerned about the tightening financial conditions and low inflation. Although the Fed is still maintaining a four-quarter-point hike forecast, the majority of experts don't believe in that prediction. Yellen has said that even negative interest rates are not impossible. This means that, given the global economic struggles, U.S. economic growth may not be off the hook yet.

“The market has been arguably pricing in four U.S. rate rises this year. However, given a weak economic recovery and highly accommodative stance of monetary policies outside the United States, we are likely to see only two small rises. This should again stimulate (gold) prices,” Thompson Reuters reported.

Western safe-haven buying and increasing demand in Asia could further boost prices; small investors can buy low quantities from brokers like Global InterGold.

All of this has fueled gold demand. It's not only institutional investors who are buying. Some gold brokers, encouraging clients to buy low quantities of gold, have reported an increase in demand by small investors.

Although buying physical gold comes with some risks, there are trusted and reliable gold brokers like Global InterGold that serve hundred thousands of small investors worldwide. Considering the latest market developments, it is likely that services of such companies will become increasingly popular over the next few years.

Beside Western safe-haven buying by small and institutional investors, demand in Asia is gaining momentum as well. So far, Chinese buyers have not shown too much interest in the precious metal, but concerns over the economic slowdown in China and yuan weakness will most likely stimulate Chinese demand in the coming months.

Additionally, there will be increasing demand from other emerging countries as well. Russia's GDP has been falling by 3.7% in 2015 with the ruble being in a free-fall. Therefore, the central bank could try to stabilize its crashing currency by buying gold.

However, Wall Street is divided over whether the latest spike in gold prices indicates a long-term upward trend. JPMorgan (JPM, Financial) has advised investors to buy gold in order to hedge against a coming global recession. Wells Fargo (WFC, Financial), on the other hand, maintains a bearish outlook for commodities in general.

In any case, it won't harm if investors purchase at least small amounts of gold. Let's be honest, 2016 won't be the year of extraordinary returns anyway. However, instead of holding cash, it might be smart to buy some physical gold. Bull market or not, having a real value is a good hedge against a potential global recession.