Why Gold Has Been on a Tear in 2016

(February 9, 2016 - by Aaron Task)

Janet Yellen holds the key to what comes next.

The stock market is having a horrible time so far in 2016, with the S&P 500 down more than 9%. Gold, on the other hand, is up nearly 10% year-to-date and hit a four-month high of just under $1200 per ounce on Monday before dipping 0.7% Tuesday to $1189.30.

It’s a bit of a cliché to say that people turn to gold in times of uncertainty: Sometimes that works, sometimes it doesn’t. Gold did phenomenally well from 2000-2011 but really suffered after hitting nearly $2000 per ounce in 2011. From 2011 to 2015, the yellow metal pretty much fell in a straight line amid the European financial crisis (remember Greece?), ISIS’s rise, Russia’s annexation of Crimea and quasi-invasion of Ukraine, among many other moments of ‘uncertainty.’

So why is gold rallying?

Historically, gold tends to do best when people are worried about inflation, which is not the case right now — at least not in the developed world. Gold also does well when people are worried about risks in the financial system, which is becoming a concern.

Bank stocks have fallen harder than the Dow and S&P 500 this year and, more importantly, bank-funding costs are rising. This is especially true in Europe, where concerns about Deutsche Bank DB 5.40% , whose shares have fallen nearly 40% this year, prompted both its CEO and Germany’s finance minister to publicly declare (in essence): Everything’s fine…nothing to see here. Remain calm, all is well.