But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Why gold performs well in a negative real rate scenario
Exposure to gold is also a useful strategy to take advantage of the negative real-rate environment. Typically, gold is a beneficiary when real interest rates become negative as this lowers the opportunity cost of holding the metal.
While I still believe that the precious metal should be a part of a diversified portfolio, I see four reasons why gold prices are likely to decline going forward.
The most important factor is the recent strengthening of the U.S. dollar (or USD) against other currencies. This led to a decrease in gold prices. The decrease was driven by many factors.
The World Bureau of Metal Statistics provides the world mine production data on a monthly basis. Year-to-date (or YTD) the world production is 1,602 tons. This is 1.3% higher than the same period last year.
According to the latest data, inflation for August was 7.8% YoY. Growth in the CPI averaged 8% since 2005. Consumer price inflation is higher than benchmark interest rates.
When we combine the nominal rate of 3% and inflation of 2% for August, we arrive at 1% real rate of interest for savings. This rate is increasing. The increase is a result of inflation.
In 2013, China became the world’s largest gold market. It accounts for around a third of the global gold demand. The World Gold Council (or WGC) expects demand to grow at least another 20% by 2017.
Outflows from exchange-traded funds (or ETFs) led to an ~28% fall in gold prices in 2013. They sold a combined 881 tons of gold. It’s very important for investors to monitor the change in ETF holdings.
Central banks hold close to 20% of all the gold that has ever been mined. The sheer holding size is why central banks around the world can significantly influence gold prices.
After the 2008 global financial crisis, the Fed’s balance sheet expanded from ~$850 million to more than $4.4 billion. The Fed buys long-term securities. Long-term securities provide banks with excess reserves for lending.
The Federal Reserve (or Fed) tracks the jobs added data to decide on the interest rates. If the employment rates are at healthy levels, this signals strong economic growth prospects. The Fed may decide to increase the interest rates.
Money supply is the total amount of currency and other liquid instruments in circulation in an economy. Money supply data is usually collected and published by the country’s central bank.
The budget balance is the difference between what a country’s government earns from taxes and other sources and what it spends. A budget deficit occurs when spending exceeds earnings.
The balance of trade is the difference between a country’s monetary value of exports and imports. A positive balance is known as a trade surplus—exports are greater than imports.
The European Commercial Bank’s (or ECB) interest rate actions are important for gold and gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Kinross (or KGC).
A weaker dollar makes gold cheaper for other nations to purchase. It increases their demand for gold. Also, when the dollar starts to lose value, investors look for an investment to store value.
Gold is an alternative for investors when inflation is high. As a result, gold usually has a direct relationship with inflation. The demand for gold increases during inflation and decreases during deflation.
As real interest rates—interest rates adjusted for inflation—rise, other investments usually become more attractive. Gold usually holds an inverse relationship with real interest rates.
Gold prices have declined 12%—from the peak of $1,385 per ounce. The peak was reached in March. In 2014, gold is currently trading at its lowest levels. Investors usually view gold as an inflation hedge.
Profitability in the refining industry is determined by the revenues earned by selling finished products minus the cost of crude inputs—until recently, refiners were buying lower priced crudes to produce refined product, which sold at better prices internationally.