More Inflows for Precious Metals

May 20th, 2016 by

As quickly as investors can pull their money out of equity funds, they are piling that cash into precious metals just as fast. This pattern has accelerated recently and only confirms that precious metals tend to outperform their counterparts in the stock markets during times of economic uncertainty.

Given the swift reversal in tone from the Federal Reserve regarding its interest rate hike path, the markets around the globe are dealing with considerable uncertainty.

FOMC Hawks

Source: MarketWatch

Source: MarketWatch

It wasn’t long ago that Fed Chair Janet Yellen was walking back the timing of the Federal Reserve Open Market Committee (FOMC) projected rate hike schedule: she recently implied that yet another round of quantitative easing (QE) could be on the table.

However, is a 180-degree turn, Yellen and the rest of the FOMC seem to be striking a hawkish tone about how it will act with respect to interest rates. Several other Fed officials have suggested that raising interest rates is now “appropriate.”

Wall St generally doesn’t react well to any news—credible or not—that the Federal Reserve is planning to tighten monetary policy. Lower interest rates make it easier for businesses, especially small ones, to maintain consistent access to credit lines, among a host of other effects. This has all set up a situation where a June rate hike is decidedly a possibility. The betting odds of this occurring jumped from 15% on Tuesday to 32% now.

Fund Inflows

The dynamic mentioned earlier where stocks gain and precious metals rise amid market anxiety has certainly played out of late. Equity funds that track the various world stock markets are seeing considerable outflows after the FOMC came out with its more hawkish position. Instead, these dollars are flowing into precious metal funds.

Gold funds have seen inflows of investment in 18 out of the last 19 weeks, including $1.8 billion last week. Meanwhile, $4.9 was pulled out of U.S. equity funds last week, the sixth straight week of such outflows. The $1.1 billion that flowed out of European equity funds was the smallest figure fleeing this sector in six weeks, although it adds to their 15-week losing streak.

On whole, global stocks have fallen to two-month lows while the dollar hit a six-week high and the 10-year U.S. Treasury yield spiked to a three-week high. If the Fed does go ahead with increasing interest rates, it could set up a series of disruptive events internationally given the divergence with the stimulative, accommodative policies of the European Central Bank (ECB), Bank of Japan (BOJ), and People’s Bank of China (PBOC).

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.