The Generalist’s Case for Getting on Board with Gold
There are times when I love gold. Times when I hate it. Times when I just ignore it.
But right now, I believe you have to get on board with gold.
I say that as a generalist, a guy who focuses his research on many markets, not as a "gold bug."
That's because very few assets offer as attractive a combination of powerful, fundamental drivers, relative “cheapness,” and the potential for sizable gains over the next few years.
Just look at interest rates. One of the biggest complaints about gold is that it doesn’t “yield” anything. Unlike a government, corporate or asset-backed bond ... not to mention, dividend-paying stocks ... it doesn’t spin off any income.
This issue always lurks in the back of people’s minds. But it moves to the forefront when central banks go on the interest-rate warpath. Each hike they implement causes gold’s yield disadvantage to grow.
But, as I’m sure you know by now, the Federal Reserve hit the panic button several weeks ago. After spending years planning and implementing a series of steps to raise rates and shrink the balance sheet, they threw it out the window.
They paused their rate hikes and hinted the balance sheet could remain much larger than previously thought. Many foreign central bankers started singing from the same dovish hymnal, too.
Now ignore for a minute whether this will “work” in terms of re-invigorating the stock market or the economy for more than the short term. The credit cycle history suggests it won’t. What matters for GOLD is that it halted the rise in U.S. rates. It also helped drive yields on many foreign bonds deeper into NEGATIVE territory.
In fact, benchmark German government bonds are trading with negative yields all the way out to more than nine years on the maturity curve. Swiss government bonds are now negative all the way out to 15 years. The only way you can find a positive rate of return is by locking your money up for several years or, in some places, more than a decade!
That’s incredibly bullish for gold based on math alone. After all, “0%-yielding” gold beats the negative-whatever you’re stuck “earning” on many government bonds.
Now let’s talk about volatility. The same soothing central bank chatter that sent yields down helped drive the Volatility Index (VIX) lower. But it’s still higher than when market complacency hit all-time highs in 2017.
As I’ve stated before, I believe that low-vol era is over. Kaput. Finito. And that brings me back to gold.
It’s the ultimate safe-haven investment. It’s no coincidence that both gold and volatility bottomed around the same time last summer, and then rose in tandem.
It’s also very interesting that gold didn’t pull back when the VIX declined recently. This tells me investors may be much more concerned about renewed volatility than they’ll admit publicly.
Speaking of potential volatility, keep this in mind: When the stock and credit markets go haywire, it tends to bolster gold prices, too. That’s because gold offers “chaos insurance,” or protection against the unknown.
Now, think how incredibly valuable that kind of protection should be today given: A) The explosion of untested, experimental, side effect-laden monetary and fiscal policies of the past decade and B) The extraordinary size and scope of the asset bubbles that have built up as a result.
In the second half of 2007 and the first half of 2008, when markets began plunging last time, gold surged to around $1,030 an ounce from $680. During the bear market that ran from 2001 through 2003, gold surged to around $390 from $255. Those are gains of 51% and 53%! Not too shabby, especially when you consider what happened to stocks during those timeframes.
I could also highlight how China just threw more stimulus at its economy, and how that has helped bolster metals prices. Or how gold seems to have broken free of its tether to the U.S. dollar, rising in value regardless of whether the buck is up or down. Or how unlike most of the other asset classes available to investors, gold isn’t radically overvalued already.
But I think you get the picture: Gold has a TON of things going for it. That means investors have a lot of different ways they can “win” by investing in metals.
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Own some gold bullion or coins in your portfolio, either directly in physical form or indirectly through ETFs like the SPDR Gold Shares (GLD, Rated “D+”) or iShares Gold Trust (IAU, Rated “D+”).
Consider joining me for the 2019 Money, Metals, and Mining Cruise this December. I’m going to be participating in this enriching, educational event along with noted gold experts, including Brien Lundin of Jefferson Financial and Rick Rule of Sprott Inc.
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Until next time,