It’s Time to Take the Gold Bulls Seriously

Gold is on the verge of entering bull market territory, following huge selloffs across global stocks this week.

US bullion prices gained 5.8% yesterday, fetching close to US$1,264 an ounce. That’s the highest level gold has traded at since February 2015. Already, prices have risen 18% this year. Even as oil, iron ore and copper prices continue their struggles, gold is shooting in the opposite direction.

Perhaps the biggest boost to gold came from US Federal Reserve chair Janet Yellen yesterday. In a statement given this week, Yellen didn’t discard slashing interest rates into negative territory should there be a need to do so. Just what constitute such a need in the mind of the Fed is unclear. But you suspect there’s not much stopping them from cutting rates right now.

Either way, gold predictably shot up following that little nugget from Yellen. It’s easy to see why. Unlike other assets, low interest rates increase demand for gold as the metal doesn’t pay interest.

Elsewhere, gold futures for April delivery also rose, gaining 4.5% to finish on US$1,247 an ounce. And should futures markets top US$1,259 an ounce, gold would officially enter bull market territory. If that doesn’t raise even further panic in the market, nothing will.

In any case, what’s clear beyond any shred of doubt is that investors are piling back into safe haven assets. And there’s no safer haven than gold. Bullion investors have reason to feel a little smug, but they’re not likely to care about

In truth, gold bugs don’t pay that much attention to where prices head; not nearly as much as you’d think. After all, these are people who need little persuasion in holding gold. They’ve got faith in the importance that gold has in balancing portfolios. Instead of seeing it as a way to grow wealth, they view it as a safeguard of wealth. That’s an important distinction, and one that people often overlook.

As for the broader market, well, it follows gold prices more closely. Not because there’s a huge demand for gold itself necessarily among them; but because they use gold as a reference point for the state of the global economy in general. So if gold prices spike, there’s a good chance either economic prospects are waning, or that other assets are tanking. Or both, as is usually the case.

Historically, bullion tends to do well when markets get panicky about the future. Right now, they have every reason to feel anxious and worried. Global growth is slowing, and negative interest rates are rearing their ugly head. Throw in stock market routs and weak commodities, and the extent of concerns weighing on investors is laid bare.

Why gold remains undervalued

Despite the recent gains, gold is still likely undervalued as an asset class.

Paul Singer, the billionaire founder of hedge fund Elliott Management, recently suggested gold could reach US0$8,000 an ounce in the future:

In a world where the value of paper money is affirmatively aimed at being degraded by central bank policy, it’s kind of surprising to me that gold can’t catch a bid.

I like gold. I believe it’s under owned. It should be a part of every investment portfolio, maybe five to 10%.

Singer shares the scepticism many of us have about today’s central banking monetary policy. The endless monetary easing has created more problems for the world, not less.

The effects of these reckless, low interest rate policies are nowhere more apparent than in stock markets. Yes, stock markets have had a horrid time of late. But the S&P500 is still up 1,259 points since 2009. The ASX200 has also gained 1,862 points since 2009 as well. In the grand scheme of things, this could only have happened under the watch of irresponsible central bankers.

But the future for gold is looking brighter than ever.

Today you find that the value of paper money is eroding everywhere. Gold should be an even bigger haven for investors than it is. But that hasn’t transpired. Too many people still see it as a hedge against other assets. They don’t see it as a store of value, which is what it really is.

We need to get past a point where earning interest is the only thing investors care about. Uncertain times call for prudence when investing. Not everything needs to be tailored to making returns. It’s fine that not every investor sees it that way. Yet some things, like the safety of your wealth, are more important than the odd gain on the share market.

Either way, gold prices are likely to enjoy a period of stability in the coming months. Whether or not they’ll remain on an upward trajectory is unclear. The likelihood is that it won’t. Like stock markets, gold tends to fluctuate up and down based on changes in mood on markets. But with the likelihood that US interest rates won’t creep any higher, gold has a good chance to consolidate its price gains.

In any case, the conversation on gold won’t change. Gold bugs will say that anyone not sitting on gold is playing with fire with their portfolio. Detractors will maintain that it’s a useless asset that pays no returns. It’s always been that way. And it’s unlikely to change.

Finally, a quick roundup of the largest Aussie gold producers on the ASX:

Newcrest’s [ASX:NCM] stock is up 4.7% overnight, trading at $17.09 this morning.

Alacer Gold Corp [ASX:AQG] gained 4.91%, at $2.78 a share.

And Evolution Mining [ASX:EVN] is up 12.2%, at $2.11 a share.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Gold bugs don’t pay much attention to bullion prices. It’s reassuring watching gold prices rise, but it’s not the reason most people own gold. What’s more important is that gold safeguards wealth. Prices become irrelevant, because gold never loses its value.

In a world filled with so much uncertainty, owning gold seems more necessary than ever before. While Australia weathered the 2008 GFC, we might not be so lucky this time around.

Markets and Money’s Greg Canavan says a recession is inevitable this year. In a free report, ‘Australian Recession 2016: Unavoidable’, Greg reveals how we’ve found ourselves in this position, and what you can do to shield yourself from it.

From declining growth rates, and terms of trade, all signs point to a major crash. Government revenues have sunk, while household debt is higher than it’s ever been. It all adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. Provided you act now, you can protect yourself from the fallout of the coming recession. Download your free copy today to learn how to safeguard your wealth from the coming crash. To find out how to download Greg’s free report right now, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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