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In only one unassuming weekend in the middle of July you saw how quickly geopolitical events can spiral out of control. July 15-17 witnessed a severe and bloody terrorist attack in Nice, France and a substantial but ultimately failed coup against President Erdogan in Turkey. The events of the weekend serve to remind you how important gold actually is to any well balanced portfolio or retirement holdings.
Turkish Coup Shows How Quickly Geopolitical Events Can Spiral Out of Control
Just when investors thought the risk-on trade was safe once more after the calming of markets following the shock Brexit leave vote, they were reminded again how even a major internally strong country like Turkey is only one coup away from chaos. The Friday night attempted military overthrow of the 17th biggest economy in the world unsettled global markets, starting with Turkey's lira and stocks and ultimately spreading to other emerging markets around the globe. Investors have learned again how political risks are alive and well in the world, especially in the developing world. Investment dollars have been searching for higher returns in these poorer countries overseas, oblivious to the risks. This goes to show you how vulnerable currencies, stocks, and bonds in these developing nations actually are, especially after a five month rally. This political and economic drama in Turkey came hard on the heels of the surprise Brexit referendum results of June 23rd from which markets saw incredibly steep declines of nearly $4 trillion erased from the global securities values in only two stunning trading days. All of this reminds you why gold should never cease to be an important part of your investment and retirement strategy.
BOE Stimulus on the Way
The Bank of England is the unassuming hero which will quickly come riding to the rescue of the British economy that threatens to derail not only the economy of the U.K., but potentially the remaining European Union fragile economic recovery, and even that of the world economy. Economists and observers widely expect that the BOE will ease its interest rate at its next upcoming policy meeting set for August 4th. Futures price in an incredible 70% chance of a .25% interest rate cut to another historical low rate of only .25%. They also predict a greater than one-third chance of this important rate being reduced to 0% by the end of the current year.
The wildly gyrating pound is good for gold and the precious metals but bad for the interconnected world economy. Every one of the most accurate pound forecasters save one has reduced its forecasts for the currency following the Brexit vote, some of them severely. With Sterling trading at $1.32 now, both Goldman Sachs Group and British banking giant HSBC Holdings see it at $1.20 by the end of the year. Fellow Anglo-Asian bank Standard Chartered even sees the pound crashing to $1.18 by the conclusion of 2016. These predictions will have major ramifications for international trade, banking, and investment if they materialize.
U.S. Company Profits Set for Fourth Straight Quarterly Decline
The global economic malaise is not limited to Great Britain and the European Union either. Even now the U.S. quarterly earnings are set to show that American company profits have deteriorated for the fourth consecutive quarter. Using analyst forecasts for S&P 500 index companies, Thomson Reuters anticipates that the adjusted earnings per share on the second quarter of 2016 will show a decline of 4.7% year over year. The first quarter witnessed a steep 5% drop already.
It is not only profitability on the chopping block either. Revenues are predicted to dip by .8%, representing the sixth consecutive drop for American company revenues. Sadly, it is not any one single factor bogging down American corporate earnings these days. Energy companies are struggling with tanking oil prices. An anemic merger market and historically low interest rates continue to put the squeeze on the financial sector. Even darling heavyweight Apple is reeling from a saturated cell phone market.
Fed Rates Potentially on Hold for 2 Years
With all of the economic uncertainty and corporate disappointment as a backdrop, respected St. Louis Federal Reserve Bank President James Bullard argued on Friday that the U.S. central bank will only be able to raise interest rates a single time this year before going on hold for both 2017 and 2018. This position would ensure that artificially low rate stimulus continues in the U.S. for the foreseeable future. Gold is always particularly sensitive to higher interest rates which serve to raise the so called opportunity cost of holding gold bullion and other assets without a yield and to increase the value of the dollar against which gold is generally measured. Interest rates on hold would continue to support higher gold prices for some time to come.
Expectations for Worldwide Stimulus Measures Temporarily Hurting Gold Prices
Gold has suffered some price setback in the last week as investors have come around to the position that risk-on is a sensible idea given the increasing likelihood that global central banks will have to turn the stimulus package taps back on soon. The EU and Japan have already done so and the BOE looks set to throw its hat in the ring as well next month. As risk assets appreciate, they do so somewhat at the expense of safe haven assets like gold. Speculators responded last week by cutting their long term record bullish positioning on the yellow metal, the first time in the last five weeks, per the CFTC Commodity Futures Trading Commission. With all of the geopolitical problems and economic uncertainty continuously rearing their heads in the world now, this only puts gold temporarily back on sale on these short term pullbacks.