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Why Citigroup Is Buying Gold Dip, Not Equities Dip

Isaac Nuriani    |
Oct 2, 2020

By now, most Americans know the steady uptrend in gold and silver that began last year went supersonic at the beginning of the second quarter. The catalyst was the Federal Reserve’s late-March announcement that it would do everything in its power to stave off a pandemic-cued economic disaster. From April through July, gold surged 30% and silver left mouths agape with its own 70% jump over the same period.

However, both metals seemed to run straight into a brick wall with the arrival of August. Over the last two months, gold fell nearly 6% and silver dropped roughly 6.5%. The declines have been a disappointment to anyone expecting the sharp rise beginning in Q2 to go on without interruption.

Experts say a step backward was due after the recent remarkable performance of both gold and silver. At the same time, they agree that underlying fundamentals driving gold and silver higher this year are still relevant. Robustly pro-gold influences, such as highly accommodative Federal Reserve policy, remain profound. As a result, metals analysts believe it’s reasonable for retirement savers to expect the current metals bull market could continue through the foreseeable future.

Still, it’s one thing to understand at an intellectual level why metals should continue moving higher. It’s another to believe it during weeks when you’re seeing gold and silver move in the wrong direction. When that happens, you want all the reassurance you can get that precious metals really are the place to be. For its part, one global megabank is declaring that indeed metals are the place to be.

You likely are aware that both metals and equities have had a tough time of it recently. Weakening prices in asset classes often are seen as buying opportunities. But prices drops by themselves are not necessarily good justifications to purchase – or purchase more – of an asset. The anticipated economic landscape, which can be subject to sociopolitical influences, also should support a decision to buy. And according to Citigroup, the expected landscape suggests an optimal outlook for gold and a risky one for equities. For that reason, Citi is passing on the recent equities dip and putting their eggs in the gold basket instead.

Analysts: We’re Buying “Alternative Cash Preservation Assets,” Such as Gold

Just as gold dropped about 6% over the last couple of months, equities sank roughly 7% in September. Because the price deterioration of each asset is less than 10%, neither pullback officially qualifies as a correction. Still, the drops are large enough that they’re prompting observers to consider whether there’s an improved buying opportunity in one or both assets.

One can imagine cozy meetings in Citigroup board rooms or trader cubicles to discuss this very thing, which may have resulted in the bank’s decision to take advantage of this opportunity for gold and take a pass on equities.

Why did they decide to go with gold and not with equities in spite of the similarity in their recent declines? Note that significant drops in asset values can create buying opportunities, but they don’t in all cases – underlying drivers still matter. In this case, Citi believes recent roiling U.S. social and political upheaval enhances the inherently pro-gold economic environment that exists right now. However, the bank sees the very same upheaval as being especially threatening to traditional risk asset stability in coming months.

“A political process that cannot accurately ascertain its leader, parties refusing to accept results and potential social disorder all damage credibility and lower the confidence of investors, especially in light of everything else happening in the background,” Citi strategists write. “Challenge to the rule of law would lead to a reassessment of historically ‘safe’ U.S. assets (including U.S. Treasuries and the U.S. dollar) even if only temporary.”

The prospect of worsening political turmoil against the backdrop of continued Fed quantitative easing and massive government deficit spending is ideal for gold. And that same political turmoil could prove to be big trouble for risk assets. Citi’s response? To look past the dip in equities and buy the gold dip. In Citi’s estimation, growing uncertainty is “likely to push investors back into alternative cash preservation assets.”

Sociopolitical Upheaval Should Add to Gold’s Current Appeal

Not long ago, I wrote a piece detailing just how common pullbacks are during precious metals bull markets. One of the great examples is the gold and silver bull market that stampeded through our nation from 2008 to 2011. Ultimately, gold closed out that bull run after having surged a full 160%. Yes, along the way, the metal stumbled plenty of times. From February to April 2009, gold fell backward 12%. From November 2009 to February 2010, it again dropped 12%. But as long as the overall environment during the downswings remains favorable for gold, the dips shouldn’t be a source of much worry. When they do happen, those drops can be legitimate opportunities for savers who’ve been sideline observers to buy in at a better price.

So, here’s one rule of thumb: buying opportunities during dips truly exist only if the asset’s fundamentals are still optimal. This, I am guessing, is why Citi believes the environment for gold should be especially favorable going forward.

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