Don’t Look Now, But Gold Just Finished Its Best Year Since 2011

The comments above & below is an edited and abridged synopsis of an article by Clint Siegner

Metals investors may have missed it, but gold just had its best year since 2011. Perhaps in a year like 2017, 13% gains are not inspiring. US stocks finished about 25% higher for the year, and cryptocurrencies left all other asset classes in the dust.

Luckily, precious metals have served both as an inflation hedge and as a safe haven for most of recorded history. It is less likely that investors will get through another 12 months while ignoring both inflation and market risk simultaneously.

Meanwhile, the US dollar ended the year with a whimper. It fell 10%, its worst performance in more than a decade. That weakness has yet to show up as price inflation in consumer goods and services. It has instead been felt in asset prices.

Consumers haven’t noticed the weaker dollar, which may explain why gold (an inflation hedge) isn’t getting much attention. That may change if President Trump can add his debt-financed infrastructure spending program to the tax cuts. Both represent fiscal stimulus for Main Street, and a shift from Wall Street-oriented monetary policy.

Fiscal stimulus programs should contribute to more weakness in the dollar, as deficits and borrowing increase. If the dollar loses another 10% in the year ahead, metals ought to be significant beneficiaries.

The recent strength in precious metals may be signaling that price inflation is on the way.

The Fed has been raising the Fed funds rate for more than two years, with little effect on bond yields and interest rates on consumer loans. When dealing with centrally planned markets, anything is possible in the short term.

The most likely alternative to inflation over the coming months is asset deflation. If investors aren’t talking about rip-roaring asset markets this time next year, they may be talking about bubbles popping instead. There are certainly a number of bubbly markets, and a near total disregard for risk. That is a potent combination.

Either way, don’t expect the metals markets to go unnoticed in 2018.