Penn Wealth Publishing

2019.09.15 Penn Wealth Report Vol 7 Issue 04

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8 penn wealth Report volume 7 iSSue 04 15 Sep 2019 Copyright 2019. All Rights Reserved. inveStment Intelligence Most everyone understands that investors flock to gold when uncertainty abounds; the quintessential flight to safety. For the five years leading up to 2019 we steered clear of the yellow metal, but we added a strong position at the start of the year. Gold has rallied since, hitting a fresh six-year high. Fewer people may be familiar with the signals sent by the price of base metals, such as copper, aluminum, iron, and zinc, but their messages have often been har- bingers of trouble. Copper, for example, has been such a handy proxy for the economy that it has been given the name "Dr. Copper," a moniker bestowed because of its expertise (hence, its Ph.D.) in gaging changes in economic activity. And that makes sense, as copper is such a widely-used metal in industrial production and electrical equipment manufacture. If prices are dropping, it is reasonable to assume that there is less demand (assuming there hasn't been a major supply disruption) in the marketplace. Extrapolate this out just a bit, and it becomes rea- sonable to use the divergence between gold and base metals as a potential leading economic indicator. If gold prices are rising (they are) while base metals are falling (they are), it could portend trouble on the hori- zon. Of course, before jumping to this conclusion we must consider all of the factors that have led to the rise, or fall, in the respective prices of these metals. Gold's rise: it's all about fear and uncertainty. Obviously, supply and demand are the two factors at the forefront of a discussion about the price of just about anything. With this particular ancient metal, however, this key price component is quite lopsided. As it is, the world mines only about 2,500 tons of gold per year, which is equal to only about 1% of the world's reserves. And, unlike other commodities such as crude, corn, or sugar, gold isn't consumed or used up; it just sticks around. So, if supply is steady and reserves are steadily increasing, that must mean that demand is rising at a much faster clip. While inflation is often a catalyst for the price of gold, a stubbornly-low level of inflation has bedeviled the Fed. en there is the relationship between the US dollar and gold. Since most gold is priced in US dol- lars, a weaker greenback typically means higher gold prices. As with inflation, we strike out on this count as well. e US dollar has remained strong amidst a sea of printing press activity across Europe and Asia, but gold is at a six-year high and rising. at leads us to the fear factor. When fear begins to grip the markets, investors look for non- or inversely-correlated assets for some semblance of cover. In the past, decent-yielding fixed income instruments have been the recipient of most of the "fear" dollars, but with interest rates low and (probably) going lower, that tide has been stemmed. Instead, buyers have flocked to gold. is time around, fear has been the number one driver of gold prices. Unfortunately for the global economy, we don't see that changing over the course of the next eighteen months. What the "useful" metals are telling us. Very little gold is used in construction or manufacturing. In fact, of the total cur- rent annual demand of nearly 5,000 tons, only about 10% of that amount will be used for industrial purposes. Contrast that with silver, of which approximately 60% of demand is accounted for by some type of industrial use. The divergence between these metals might be an ominous sign for the global economy...or maybe not. Gold is Up, Base Metals are Down; Should we be Worried? Metals & Mining

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