Gold firmed to new highs on the week, bolstered by the further dimming of trade deal optimism, a softer dollar and mounting global growth risks.
The latest snag in the trade deal negotiations reportedly center on Chinese agriculture purchases from the U.S. We have heard numerous times throughout the trade saga that China was prepared to buy $50 bln worth of U.S. agricultural products per year; even that those purchases had begun.
Now apparently this is a sticking point as China doesn't want to be locked into a specific dollar value. Market chatter that a Phase 1 trade deal was nigh has been a source of risk appetite in recent weeks, but that optimism is now being at least partially unwound.
Weaker than expected Chinese industrial production, retail sales and fixed-asset investment data suggest that the trade war is taking its toll on the economy. Downward revisions to GDP are increasingly likely with risks to the labor market as well.
Meanwhile, the Japanese economy slowed markedly to just +0.2% in Q3, down sharply from +1.8% in Q2. Here too, the U.S.-Sino trade war and weakening global demand for Japanese exports are being blamed.
While German Q3 GDP came in slightly better than expected at +0.1%. Expectations were for flat growth, versus a negative revised -0.2% (was -0.1%) in Q2. While a recession was narrowly averted, the German economy remains on the ropes.
Mounting global growth risks should sap risk appetite, offering support to safe-haven assets like gold. That being said, U.S. shares while lower today, suggest U.S. investors are not overly concerned. Yet...
A recent UBS survey of more than 3,400 high net worth investors showed that 55% expect a "significant" drop in the markets at some point in 2020. They are already moving into cash.
Interestingly, a recent World Gold Council survey shows that the higher the income band of an investor, the more likely they are to have bought gold in the past 12-months.
In a great Kitco News interview today, Ryan Giannotto, Director of Research at GraniteShares points out that gold has zero correlation to the market, or any other economic force for that matter.
One of the exceptions, of course, is the dollar, where there is an inverse correlation. However, as Giannotto points out, "we all should" hedge our exposure to the dollar.
“We have found that the efficient level, the optimized level, was 35% gold. Not saying you should own 35% gold, that’s an awfully high concentration, but it challenges the conventional wisdom of what pertains to gold and how to use it.” – Ryan Giannotto, Director of Research at GraniteShares
He goes on to say that the amount of gold to hold in a portfolio in order to optimize one's risk/return profile is 35%! I have always maintained 10%-30% was the appropriate allocation range for most investors. But please understand it is typically prudent to build your allocation over time, rather than jumping in all at once.
Steady consistent buying is the order of the day, with the goal of reaching – and then maintaining – an allocation within the 10%-30% range. Based on Giannotto's research, the high end of that range is now 35%.
Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Financial Services LLC, unless otherwise expressly noted.
