A rising U.S. Dollar Index was putting downward pressure on hard assets markets last week. Dollar bulls were counting on the Federal Reserve to start tightening its ultra-loose monetary policy. They expected the Fed to begin tapering its monthly asset purchases later this year. Minutes released on Wednesday from the FOMC’s latest meeting suggested policymakers are leaning in that direction.
But there is a massive gulf between beginning to taper bond purchases and finally hiking their benchmark interest rate several times to exceed the inflation rate. Anything short of a positive real Fed funds rate still represents accommodative monetary policy. And that will be in place for the foreseeable future.
The Fed can be counted on to continue to debase the currency. What’s less certain is whether other national fiat currencies will fall or rise in exchange rates versus the U.S. dollar. But over time, they will all fall versus real assets as inflation persists.
Traders in fast-moving markets can be very short-sighted, though, especially if they are employing leverage. Commodities and precious metals futures markets got hit with lots of sell orders this past week, although gold prices were holding up fairly well here.
Gold sometimes serves as a sort of safe haven within the hard assets space. And that was true last week as crude oil, copper, and the white metals all got hammered.
Even as the precious metals sector was currently out of favor among mainstream investors, contrarians were seizing the opportunity to accumulate. Some big institutional buyers were entering the market.
The technology company Palantir Technologies (NYSE:PLTR) purchased $50 million worth of gold bars in recent weeks. The news surprised and confused some of the talking heads on CNBC. But analyst Guy Adami stepped in to explain why physical gold makes sense in an environment of uncertainty and inflationary monetary policy.
CNBC News Report: Data analytics company Palantir buying more than $50 million worth of... get this… gold bars in August, according to a regulatory filing. The company is able to take physical possession of the gold at any time with reasonable notice.
CNBC Talking Head: I don't recall ever seeing this except for maybe a gold related company, and that would be a raw material or work in process or inventory or something. It's interesting. It's sort of surprising. It's kind of (like), we were expecting like a Bitcoin or something like that or an altcoin.
Guy Adami, CNBC: Notice that they didn't buy the gold ETF, they bought actual physical bars of gold. It's fascinating. There's no con... Listen. I mean, I could talk about this for an hour and we only have a minute left. But I would say this is one of those days you bookmark. This is them saying, you know what? Central banks are out of control black Swan event. Good for them. And my sense is you're going to see more of that."
Exchange-traded products that track gold prices are ultimately still financial assets. They have counterparty risks, including credit risk. If an investor’s objective in owning precious metals is to diversify out of the financial system, then only physical ownership held securely outside of Wall Street brokerage houses and banks will do.
Seasoned precious metals investors keep their focus on their long-term objective. They don’t seek financial substitutes. Nor do they wait to buy until mainstream media headlines tell them the gold market is hot. Instead, they accumulate low-premium bullion products over time—ideally when prices are pulling back and the market is quiet—aiming to get the most ounces for their dollars.
But they know that trying to perfectly time the market is virtually impossible. Nobody knows when the next black swan event or other catalyst will ignite a major metals rally.
It’s prudent to always hold a core position and ideally be able to add to it regularly.