With Gold Down 12% Since Election Day, It’s Time To Rebalance

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December 20, 2016 6:35am NYSE:GLD

gold in hand

For only the second time since 2008, the Federal Reserve raised interest rates last week, surprising no one. Although the 25 basis point lift was in line with expectations, markets took some time to digest the news that three rate hikes—not two, as was earlier expected—were likely to happen in 2017.


Major averages hit the pause button for the first time since last month’s presidential  election, but the Trump rally quickly resumed Thursday morning.

The two-year Treasury yield immediately jumped to a nominal 1.27 percent after averaging 0.80 percent for most of 2016, an increase of 58 percent. In real, or inflation-adjusted, terms, the yield is still in negative territory, but it’s clearly heading up following the U.S. election and rate hike. Thirty-year mortgage rates, meanwhile, hit a two-year high.

Real 2-Year Treasury Yield Heading Up Following Election and Rate Hike
click to enlarge

Gold retreated to a 10-month low. As I’ve explained many times before, gold has historically had an inverse relationship with bond yields, performing best when they’re moving south.

It’s worth pointing out that the most recent gold bull market, which carried the yellow metal up 28 percent in the first six months of 2016, was triggered last December when the Fed hiked rates.

Will Gold Respond Similarly to Fed Policy?
click to enlarge

Again, as many as three rate hikes are expected in 2017—unlike the one this year—with Fed Chair Janet Yellen commenting that economic conditions have improved well enough to warrant a more aggressive policy. If true, this should accelerate upward momentum of Treasury yields and the U.S. dollar—currently at a 14-year high—which could dampen gold’s chances of repeating the rally we saw in the first half of this year.

More Than $10 Trillion in Negative-Yielding Bonds

Other gold drivers still remain in place, though, including negative-yielding government bonds elsewhere around the world. The value of such debt has dropped considerably since the election of Donald Trump, but it still stands at more than $10 trillion, supporting the investment case for the yellow metal. And as I mentioned previously, many of Trump’s protectionist policies—opposition to free trade agreements, imposition of tariffs on Chinese-made goods—are expected to heat up inflationary pressures in the U.S., which could serve as a gold catalyst.

What’s more, gold is looking oversold, down two standard deviations for the 60-day period, which has historically signaled a good buying opportunity. With prices off close to 12 percent since Election Day, I believe this is an attractive time to rebalance your gold position. I’ve always recommended a 10 percent weighting, with 5 percent in gold stocks and the other 5 percent in bullion, coins and jewelry.

Learn what’s driving gold today!

The SPDR Gold Trust ETF (NYSE:GLD) fell $0.57 (-0.52%) to $108.02 in premarket trading Tuesday. Year-to-date, the largest ETF tied to gold prices has gained 7.03%.


All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

The MSCI World Financials Index captures large and mid-cap representation across 23 Developed Markets countries. All securities in the index are classified in the financials sector as per the Global Industry Classification Standard (GICS). The Dow Jones U.S. Financials Index, a member of the Dow Jones Global Indices family, is designed to measure the stock performance of U.S. companies in the financials industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

About the Author: Frank Holmes

frank-holmesFrank Holmes is the CEO and chief investment officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal, and in 2011 he was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. He is also the co-author of The Goldwatcher: Demystifying Gold Investing. More than 30,000 subscribers follow his weekly commentary in the award-winning Investor Alert newsletter which is read in over 180 countries.

Under his guidance, the company’s mutual funds have received recognition from Lipper and Morningstar, two trusted independent financial authorities. In 2015, Mr. Holmes led the company into the exchange traded fund (ETF) business with the launch of the U.S. Global Jets ETF, which invests in the global airline sector.


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