January 24, 2019

The year for gold to shine brightly may be upon us. But actually, the story began last fall as large cracks in the decade-long broader equity love-fest started to show.

Inflation is no longer as important a barometer for problems in markets in modern times, since quite frankly, it’s hard to locate these days. U.S. Federal Reserve (Fed) Chairman Powell has talked about “looking beyond inflation” and “destabilizing excesses”. Was inflation a big predictor of problems to come ahead of the tech bubble and the subprime mortgage crises? No. In fact, the Fed helped to inflate those bubbles with low interest rates. So, low rates are a problem, and this past decade the cost of taking risk became too low in a zero-yield environment.

The Fed is coming to its senses and therefore bonds roll off the U.S. balance sheet – and perhaps rate hikes will continue for slightly longer than investors expect. The global monetary base is shrinking – there’s less money – it’s just math, plain and simple. Less money, higher rates, less speculation. Global GDP growth was just downgraded and sluggishness out of China has been startling. This is a new reality and markets will continue to struggle on many fronts. So will macroeconomic uncertainty remain elevated? You bet. Check the box for gold bulls. Political uncertainty throughout Europe and the U.S.? Check the box.

It is possible that in the shorter-term, the Fed will be able to support equity markets by being more patient with hikes. Gold competes with yields and should do better as the Fed potentially slows down. Again, even this is bullish for gold. Check the box. This should, in turn, result in a weaker U.S. dollar, which is also bullish for gold. Check the box. What if inflation does indeed make a comeback (which I wouldn’t discount)? Gold loves inflation. Check the box. In the shorter-term, these forces may play out, but in the longer-term, there is something more sinister afoot. It is these “destabilizing” forces that will ultimately take control, and we are seeing evidence of a deleveraging cycle playing-out in the form of recent elevated volatility.

Even parties at Studio 54 had to come to an end – and this party is most certainly long in the tooth. Even worse, someone turned on the lights and partiers are peering about and wondering if they look as utterly exhausted as everyone else does. The answer is yes. The punchbowl was supersized and investors imbibed with abandon. Is it realistic to think that taking away that unprecedented high-octane elixir won’t have consequences?

• Two hundred more billionaires last year
• The same Da Vinci painting selling for $85 million in 2012 and then $400 million last year
• Markets trading near Buffett’s warning zone valuation

Yes, there is too much money at a time when liquidity in markets is record-thin. There are imbalances in the system and only the most delicate, and frankly, fortuitous actions would help to unwind them without causing significant volatility across many asset classes. Is it a surprise when markets drop sharply? Dealers are no longer the liquidity backstop that they used to be thanks to regulation that has kept them away from providing said liquidity. Selloffs now have the potential to be very quick and nasty. It might be time to look for places to hide, and people are rediscovering gold. If you haven’t already, consider checking the box on HGY or HEP.

Gold – Daily



Source: Thomson One/Horizons ETFs, from December 7, 2017 to January 18, 2019.

Gold – Weekly



Source: Thomson One/Horizons ETFs, from September 25, 2015 to January 18, 2019.

Gold – Monthly



Source: Thomson One/Horizons ETFs, from January 31, 2009 to January 18, 2019.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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