Companies announce earnings every quarter, and earnings are one of the main drivers of stock prices.
These earnings reflect a company’s wealth-creation ability, while the stock price will reflect the wealth-creation/-destruction of a company.
Earnings season can give us a good clue about the recent health of a company and its stock price. But we don’t have the advantage of corporate report cards to take the pulse of precious metals, energy and other commodities.
Now that earnings season has gotten under way again and gold has pulled back below the psychologically important $1,300 level this week, this is a good time to check in on the yellow metal.
That’s because many of the same factors that influence its value can also impact your entire portfolio …
Although I expect this to be another year of gold’s staggering profit run, I’ve found a new opportunity that could spike even higher because it’s triggered by Big Government Spending. Get all the details here …
What’s Driving Gold Prices?
Commodities don’t have quarterly earnings that can move their price, so gold and other precious resources can spend a very long time trading sideways.
The major variables that influence commodity prices are supply and demand factors, costs to produce the commodity, news events and the direction of the U.S. dollar.
Below is a long-term chart of the dollar, where you’ll see gold does go sideways for long time periods.
From the 1980s to the early 2000s gold prices traded from $250 to $400.
For almost two years starting in 2008, gold prices traded from $700 to $1,000.
Now, prices have been stuck in a range for more than a year from around $1,200 to $1,400.
What Could Move Gold Prices
From Their Current Trading Range?
In the long run, it will mostly be the cost to produce gold. It will continue to go up because the remaining supply of gold will be more expensive and difficult to produce.
The biggest catalyst over the next few years, however, could be the Fed’s balance sheet:
Before the financial crisis of 2008, the Fed’s balance sheet was less than $1 trillion; now it’s around $4 trillion.
The $4 trillion of (mostly government) securities sitting on the Fed’s balance sheet could be a major risk for the U.S. and global economy … and particularly to the finances of individuals.
One risk is that the Fed has transferred cash and liquidity to banks and the global economy in exchange for government securities.
If all this liquidity found its way into the U.S. economy (with too many dollars chasing too few goods), we could see inflation spiral out of control.
With interest rates at historic lows and the Fed’s balance sheet loaded to its gills, one of the best moves we can make is to own gold.
Some analysts have been arguing about the risks of inflation since the Fed started adding liquidity to the economy as a way to solve the 2008 financial crisis.
We haven’t had inflation caused by all the liquidity (certainly in the bond market, there is inflation). But the risk becomes greater each year.
‘No Magic Formula’
Perhaps the greatest concern is how the Fed will unload its balance sheet.
The size of the Fed’s balance sheet is unprecedented, and the Fed has never had to deal with how to unwind their massive portfolio.
This means we’re in uncharted territory now. No one really knows how this will end, though many think it will end badly.
Another problem related to the Fed is that it is basically out of effective monetary efforts and policy bullets to deal with another financial crisis.
With interest rates at historic lows and the Fed’s balance sheet loaded to its gills, it seems the only thing we can do is pray that we don’t encounter another major financial crisis in the foreseeable future.
In Fed Chair Janet Yellen’s "Humphrey-Hawkins" testimony before the Senate Banking Committee yesterday, she said there is no "formula" for when interest-rate increases will start.
"When interest rates begin to rise, if firms or individuals have taken risks and aren’t adequately prepared to deal with them, that can cause distress," Chair Yellen said.
Briefly, the Fed has been telling us they can take their time, and many of these securities will mature and self-liquidate.
If you don’t own gold, you should strongly consider it, and if you do own gold, add to holdings on pullbacks.
Good gold and energy investing,