After a Volatile Week for Stocks, Gold Set To Move Higher?
It was a volatile week for stocks all week with Friday marking the worst day this year for the markets. Friday saw the Dow Jones plunge nearly 700 points and it marked the biggest loss in 2 years for the Nasdaq. It was overall the worst week for stocks since January 2016 with the markets down most of the week leading up. The VIX rose 28% to 17 after hovering at record lows several months prior. It was the highest percentage point loss since the Brexit turmoil in June 2016 and steepest point decline since the 2008 financial crisis.
What this means for investors: A rapid jump in treasury yields is one of the reasons for the sharp sell off Friday. Rising rates are making the markets jumpy, and this is a stock market already due for a correction. In fact it has not corrected more than 3% in nearly two years. Many analysts – including Goldman Sachs – are predicting a high probability of a coming correction. This could be a start, especially if the bond market continues along this path. For metals, the spike in volatility should give gold a boost as it spurs some safe haven buying.
Fluctuating Dollar Index Shakes Up Gold This Week
Despite the heavy Dow loss on Friday, gold was down as well to close out the week. Generally gold would be up with such a decline as investors move to safe haven assets, but it was not the case this week. Gold hovered in the mid $1340 range for the beginning of the week, but closed Friday closer to $1330. The dollar, which has been showing weakness recently, got a boost this week from the Fed announcement and economic data released Friday. Silver, which is always inclined to more volatility than gold, started around $17.30 and closed just under $17 at the end of the week.
What this means for investors: Metals have been taking a cue from the dollar recently and moving in opposition. The dollar was still showing some resiliency Friday, which is part of the reason why the plunge in the stock market didn’t lift gold as much as it might have seemed it would. However, many buyers still took advantage of the price drop Friday to hedge against increased volatility in the stock market.
U.S. Debt Set to Spike Over $600 Billion in Next Several Months
A big story that is probably not getting enough attention though is the U.S. debt level and its projected increase. The U.S. national debt is set to spike by $617 billion in the next five months, according to the U.S. treasury. Its approaching its debt ceiling again, and Secretary treasury Steve Mnuchin called on Congress to lift the ceiling as soon as possible.
What this means for investors: Having such a massive deficit is fiscally reckless not to mention dangerous. In 2008 the economy turned on a dime. If it were to make a similar turn in the next few years, a deficit like this would make recovery even more difficult. The dollar would crumble and set off a chain reaction around the globe. And yet the government is increasing spending programs rather than addressing the debt problem.
Cryptocurrency Can’t Replace Gold
On Friday bitcoin fell under $8000. This is an over 50% decline from its December high of $20,000. Other cryptocurrencies experienced similar declines this week. The Friday rout resulted in an overall market loss of about $100 billion in cryptocurrency. Cryptocurrency certainly has made many investors richer quicker than gold ever has, but it won’t replace it as a store of value in the long run. These massive spikes in price over short amounts of time are indicative of that. The World Gold Council recently released a report on how crypto is far too volatile to ever replace gold. Gold has a more liquid market, trades in an established and regulated framework, and has well understood value in an investment portfolio.
What this means for investors: The crypto mania of last year is quickly fading as its volatility becomes more alarming. Because of this, the amount of early bitcoin buyers taking their profits and turning them into physical gold is rising exponentially. Until recently it was the opposite, with investors selling gold and mortgaging property to buy into the craze at its height, often to quickly experience significant losses. For a more in depth look at how bitcoin and gold are related (or just to better understand it), check out our original article below.
Read our latest original article to see what the gold investor should know about cryptocurrency
Bitcoin and cryptocurrency are undoubtedly a hot topic right now. How exactly the virtual, unregulated “currency” works though can be complicated to understand. Check out our original article that breaks down bitcoin mining, blockchain technology, and their future implications for gold, money, and society.
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