The stock market has taken investors on a roller coaster ride so far this year, starting off with a steep drop and now rising once again to possibly test historic highs. Global macroeconomic concerns centered on China’s economy and the ongoing struggle in the oil trade have contributed to the volatility. But the uncertainty in the markets has been a boon for one shimmering precious metal.
Gold has arguably been one of the best performers of the year so far. It’s been steadily rising since the end of December and doesn’t seem to be showing any signs of slowing up anytime soon. It’s up around 18% year to date and is the clear winning trade for the first quarter of the year. Going into the second quarter, investors are wondering whether the bullish gold story is near its conclusion or if it’s just hitting the next chapter.
Green Light for Gold
According to the World Gold Council (WGC), gold outperformed all other asset classes for the first quarter and should continue to grow unhindered throughout the second. Gold-backed ETFs posted their second strongest quarter on record and the building momentum behind the gold trade is expected to keep growing as investors finally return to the once-forgotten asset.
The policies of worldwide central banks pushing their respective economies towards negative interest rates along with the globalization of financial markets should help offset weak inflation data from the U.S. The Fed’s ability to accurately predict the direction of the economy has been in the spotlight lately with mixed signals earlier this year. Markets are now predicting only one rate hike this year in December with a strong likelihood that even that could be pushed back to 2017.
The lack of expected inflation in the U.S. economy and the absence of rising interest rates are generally bad signs for safe-haven assets like gold, but the overall state of the global economy should help offset those concerns.
The drop-off in the strength of the U.S. dollar, largely thanks to the lack of rising interest rates, has opened up the way for gold as well. Investors who had sought protection in the dollar’s strength are now fleeing to gold.
The Bottom Line
The lack of inflation and higher interest rates has encouraged an appetite for risk by investors as evidenced by the sudden turnaround in equities during the first quarter. If that trend continues to strengthen, it could pose a threat to gold as investors chase higher returns elsewhere.
The oil trade is a big question mark for gold as well. If there is an agreement and production freezes go into effect, that could be negative for gold. If it doesn’t, investors may retreat into gold as a safe-haven trade to avoid the subsequent volatility in equities markets.
The bullish case for gold seems stronger than the bearish one though. As long as the global economy continues on the same track, gold should outperform over the next quarter.
