The best time to buy gold is when no one is interested in it. And today, gold is deeply out of favour with investors, making it worth a look.
The price has tumbled 38 per cent from its 2011 high point, while the S&P 500 has returned more than 180 per cent (including dividends) over this same period. This year alone, gold is down about 12 per cent.
There is a key reason for gold’s decline: Fears of runaway inflation and debased currencies, which were rife after central banks introduced extraordinarily loose monetary policies in the wake of the financial crisis, have largely faded away.
Gold, widely seen as an asset that could hold its value next to flimsy-looking dollars and euros, lost its purpose. This year, with the U.S. dollar rising against a basket of currencies, things have only grown worse for gold. And investors who are attracted to novel concepts have been enthralled by cryptocurrencies instead.
But even if you snort in derision at gold as a long-term holding, it may offer a good opportunity at today’s beaten-up levels. Here are three reasons why gold makes sense right now.
One: Sentiment toward gold may have bottomed out.
According to Bloomberg, investors have been fleeing gold-tracking exchange-traded funds for 13 straight weeks, a five-year record.
Take a look at the biggest ETF, the SPDR Gold Trust: The fund has seen its gold holdings fall to about 24.8 million ounces, down more than 2.6 million ounces from a year ago. Similarly, the number of outstanding shares has declined 3.5 per cent.
What a shift. In September, 2011, the price of gold hit a record high of about US$1,900 an ounce, amid bond-buying (or quantitative easing) by the U.S. Federal Reserve and a sovereign debt crisis in Europe. The price capped a near-100-per-cent rally in two years, and many bullish forecasters believed the price would continue to soar beyond US$5,000 an ounce.
Now, gold enthusiasts are suffering. Hedge fund manager John Paulson, who made a fortune betting against the U.S. subprime market prior to the financial crisis before betting big on gold, has seen assets in his firm decline to US$9-billion this year, down from US$38-billion in 2011.
Two: If you’re concerned about financial markets, gold looks like a good insurance policy.
Yes, the U.S. bull market in stocks is emerging as the longest in history. The U.S. economy is performing well, with low unemployment. Inflation is right on target.
But you don’t have to be a worrywart to recognize that risks are rising. The U.S. Federal Reserve is raising interest rates, which could slow economic activity, while trade tensions are simmering. The yield curve, or the difference between long-term bond yields and short-term yields, is flat, which suggests that fixed income investors may see trouble ahead. And the CBOE VIX Volatility Index, a measure of investor anxiety, has declined toward record lows, reflecting what could be investor complacency.
If trouble strikes, investors may seek havens in a hurry. While there’s no guarantee that gold will benefit in times of trouble – U.S. government bonds and safe dividend-generating stocks are also popular havens, not to mention cash – it appears to be a decent bet given its historical track record of rallying when fears are rising.
Three: Ray Dalio likes gold.
It’s no fun being the only gold enthusiast, so it’s nice to know you have some backing. Mr. Dalio, who founded the massive Bridgewater Associates hedge fund (which manages about US$160-billion), is sticking with his 3.9 million shares in the SPDR Gold Trust, according to regulatory filings for the end of June, valued at more than US$440-million.
Perhaps this is in keeping with the hedge fund’s tilt toward caution. In a July interview with Reuters, Bridgewater’s co-chief investment officer, Greg Jensen, said that he expects stocks and bonds will perform poorly over the next 18 months as interest rates rise.
Admittedly, even Mr. Jensen didn’t talk up the attractiveness of gold as an alternative. Perhaps it will take a modest rally for the bulls to start speaking up again.
David Berman