So far in 2016, gold has defied conventional wisdom by soaring as much as 20% in the wake of the Federal Reserves December 2015 interest-rate increase, the first in almost a decade.
That wasnt what conventional wisdom was calling for in the months leading up to the central banks hawkish move. After all, CW holds that the yellow metal does best in low-rate environments. Thus, those who took the contrarian stance that gold would rise after a Fed hike have profited.
Commodities outperforming stocks: Perhaps the global head of commodities at the S&P Dow Jones Indices should be counted as a contrarian. As Jodie Gunzberg has noted in recent interviews, the overall commodities complex is doing what it hasnt done in quite some time, that is, beat stocks in the wake of the Feds rate hike, no less.
For example, the S&P 500 gained 3.22% year-to-date though June 6, while the S&P GSCI Index of commodities returned 10.69%. And in the past three months alone, the S&P GSCI increased by 18.1%.
If this outperformance holds through the year, it will break the longest number of consecutive years that stocks outperformed commodities, Gunzberg told The Ticker Tape. Following the last time stocks outperformed commodities for near as long in 1980-86, seven consecutive years, commodities returned almost 300% through 1990 when the trend reversed.
Rising rates good for gold: Contrary to conventional wisdom, Gunzberg told Indias Business Standard in late 2015, historically, rising rates have been good for commodities, for two reasons. One is that the return on collateral, a component of the total returns in commodities, increases as interest rates rise. The other direct and measurable impact of interest rates on commodities can be observed from the formal relationship between spot and futures prices. The theory of storage equation defines the futures price in terms of the spot price, the interest rate, the cost of storage and the convenience yield. All else being equal, commodities futures prices rise as interest rates rise.
Industrial metals have been more sensitive to interest rates than precious metals from their economic sensitivity and term structures. For a gold bull market to form, high inflation and a weak dollar would be useful, in addition to higher interest rates. Plus, ETF (exchange traded fund) buying that takes physical supply off the market is a positive indicator.
U.S. election fears boosting gold: Now that the gold bull market has returned, at least so far this year, Gunzberg thinks momentum is with the yellow metal thanks in part to the uncertainty over the U.S. presidential election, with Republican Donald Trump likely to face Democrat Hillary Clinton.
Investors love to feel the safety of gold in the volatile times, not only for the factors that I just mentioned but also the extra uncertainty and volatility coming around the election year is making the demand for gold pick up, and based on the history, again, if I look at the past index performance, it looks like gold could go well into the $1,800s, she told Bloomberg. So theres still a ways to go potentially if gold continues its pattern in the volatile times.
Yen to thrive under NIRP?: Gunzbergs $1,800 target, as well as her argument that rising rates are good for gold, could be considered contrarian, but apparently a professional investor in Japan is ready to go even further in his price prediction.
Wakabayashi FX Associates Co. President Eishi Wakabayashi has gone contrarian in his forecasts for both the Japanese yen and gold. Despite the Bank of Japans imposition of negative interest rates earlier this year, Wakabayashi thinks the yen is going to strengthen, not weaken. Hes predicting that the yen will strengthen almost 20% to 90 per dollar by early next year as Bank of Japan Governor Haruhiko Kurodas negative interest rates fail to weaken this years best-performing Group of 10 currency, according to a recent Bloomberg interview.
He has a respectable track record, having already predicted the yens record high in 1995, its faltering in 2012, and its advance so far this year.
Buy gold to preserve wealth, trader says: But Wakabayashi is even more bullish on golds prospects for the long haul. He foresees an era of global deflation, and recommends investors seek capital gains and buy gold. The metal may climb to $6,000 in the next six years as U.S. stocks collapse and the nation struggles to spur inflation, he said.
Like some other analysts, Wakabayashi touts the contrarian stance that gold can perform well during deflation, versus the conventional wisdom that bullion does best during inflation. During the Great Depression, when the price of gold was fixed, mining stocks of the commodity jumped sixfold in the five years from 1930, Bloomberg reported in summarizing his stance.
Under deflation, asset values fall across the board, Wakabayashi said. How do you protect your financial assets? Its easy: Buy gold.
Two different investors, two contrarian stances on gold, commodities, and currencies. With 2016 so far being the year of the contrarian, it might not be the time to bet against Gunzberg and Wakabayashi.