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Volatility in Gold Prices: An Educational Series #1 - Trey Reik

Volatility in Gold Prices: An Educational Series #1 - Trey Reik
By Sprott Global Resource Investments Ltd. 3 years ago 2389 Views No comments

Trey Reik is a Senior Portfolio Manager and Precious Metals Strategist at Sprott Asset Management USA, a division of Sprott Inc., a Toronto-based alternative asset manager. He is also the author of The Sprott Precious Metals Watch, a monthly newsletter produced by Sprott Asset Management LP.

February 9, 2016

After a 12-year run, some question whether gold has lost its luster (if you’ll pardon the pun) as an effective portfolio hedge following three years of consistent declines. Many have called into question gold’s investment appeal: either the decade’s long bull run in gold has reached its conclusion, or the last three years’ price declines have generated an unprecedented opportunity to rebuild a portfolio with a base in precious metals. But these conclusions are often the results of emotional decision making. Sprott Senior Portfolio Manager Trey Reik has removed the emotion, examining a host of technical indicators in his latest report. Trey’s report is a thorough one, and there have been several requests for the “spark notes” version. There’s a lot to digest, so we’ve put together a 6-part series to help break down some of Trey’s major themes.

The results of his research are surprising.

Trey’s report examines currency fluctuations, national debt levels, demand for U.S. Treasuries, recessionary threats, the seizing up of the credit markets, high valuations of the U.S. equities markets, and CFTC trading trends to paint a comprehensive picture of the current investing environment. While no single factor may draw investors back to gold this year, taken as a whole, Trey anticipates a confluence of technical events may be prompting price volatility, and potentially a recovery. View his full report here. Sprott Institutional Strategy Report - Gold

Gold is not the only asset class which could be more volatile in 2016. Recent headlines continue to be dominated by falling oil prices, the Fed’s interest rate policy, Trump’s hair, and Hillary’s emails. Many asset classes were duly ignored, leading to sleepy performance late last year: the S&P 500 Index declined 1.75%, the DXY dollar index declined 1.54%, the 10-year Treasury yields rose 6 basis points to 2.27%, the so-called-fear gauge, the Vix, largely remained below 20, and gold stayed flat.

But this could be changing.

Taken together, Trey concludes that effective beat-down of gold prices over the last three years have created not only a price floor, but also series of potential catalysts for greater demand. And while we cannot say gold is set for another 12 years of gains, we do see price volatility on the horizon.

Trey reminds us of three key reasons why gold remains relevant as a productive portfolio tool.

1. Rebalancing the U.S. Financial System . After years of intervention, the Fed is trying to normalize U.S. financial markets, but this is not an easy path, particularly as global economies become increasingly intertwined. Many question the durability of the current state of the U.S. markets, as they appear unable to support a higher federal funds rate or a more productive 10-Year Treasury yield. The Fed is seemingly unable or unwilling to extricate itself from the financial markets, and gold remains one of few internationally-recognized stores of value.

2. Recessionary Fears. The developed world is grappling with high debt balances accrued in an attempt to mitigate the impacts of the global financial crisis (GFC). While debt has been carried relatively well during periods of economic improvement, a market correction could be in the offing, and gold is often considered a flight to safety in down environments.

3. U.S. Dollar. Currently, market sentiment for the U.S. dollar is nearly unanimously bullish, but for many investors, the trade has been played through. The result is that others are looking elsewhere for further gains, and the Japanese Yen, the Euro, and the Pound have all been dragged upward by the spillover demand. But these currencies are still subject to high national debt levels and recessionary threats, so where else can investors seeking capital preservation flock? We believe gold is one such asset.

We hope you enjoy this series of educational posts which seek to explain the various technical indicators and their potential consequences on precious metal prices. Feel free to contact us to learn more - we would be happy to explain the central themes in greater detail.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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