Doc Eifrig: This is the time to own gold
From Dr. David Eifrig, Editor, Retirement Millionaire:
You can criticize gold as an investment for two reasons: Its price is volatile, and it doesn’t pay any yield. I’m far from a gold bug. I’ve got a few collectible coins that I keep… mostly just because I like them.
But I’ve long maintained that part of your portfolio belongs in gold as protection for when things in the economy get really bad – as a “chaos hedge.”
Today, “chaos” appears closer than it has been in a long time. And given the near-term prospects for gold prices, the hedge will be cheaper than it has been.
Three market conditions point to the times you want to own gold, and we’re experiencing all of them today…
First, as noted above, inflation is on the rise. It’s been running at 0% to 1% a year for several years, but now it’s crossing into 2%. That’s a reasonable rate. But if it approaches 4% or 5%, that could be disruptive (although still nothing like the hyperinflation of the 1970s).
You want to own gold during periods of inflation. In recent years, the price of gold hasn’t been as closely correlated as it had been in the ’70s, when the two moved in lock-step. But it still stands to reason that when the value of money declines (the essence of inflation), the value of a hard asset like gold will rise.
Second, you want to hold gold when interest rates are low. All asset classes compete with each other. As we said earlier, one of gold’s big drawbacks is it doesn’t pay a yield. When government bonds pay 1%, holding gold becomes more attractive. You don’t give up much yield. But when government debt pays more, say 5%, some investors would move from gold to bonds.
Today, bond yields have moved higher… But they’re still historically low. The 3% yield that U.S. 10-year government notes pay wouldn’t be considered generous at any time in history outside the past 10 years. Yields are far from rich, and gold can still earn its place.
Plus, the Federal Reserve will back off its plan to gradually hike rates quickly if it senses any stress in the economy or the stock market. A new regime of quantitative easing would send gold soaring.
Third, you want to own gold during market crashes. This one takes no explanation. Gold goes up when stocks crash and people get scared.
This next chart measures from the peak of the stock market to its lowest point. But if you held longer, gold continued to rally. Which would you prefer, to see your wealth chopped in half or earn around 20%?
Even so, no one wants to own gold today…
Buying Near a Bottom
If you’re a gold bug, it’s been a tough couple of months for you. The price of gold is down roughly 10% since the start of 2018 and down around 35% since its 2011 peak…
No one is buying today. But forget buying… traders have actively jumped on bets that gold will go down…
Large speculators in gold futures have bigger bets against the price of gold (compared with the number of all gold futures bets) than any time over the past 17 years.
My colleague Steve Sjuggerud wrote about this in his True Wealth newsletter in September…
As you know, gold’s great bull market started in 2001, from a similar degree of “hated.” And as you know, gold stocks soared starting around that time.
I realize nobody is talking about gold or gold stocks today. But that’s what you want…
In order to buy an asset at the best price, you want to buy it when it’s hated and ignored. And you want to sell it when it’s all over the news.
I expect today’s extreme means that we are close to the start of the next great bull market in gold.
Steve has made a career for himself by taking the opposite sides of popular bets. It usually pays off.
Right now, the level of bearishness on gold is at an extreme… We think it’s become too bearish.
Traders have a couple reasons to be so pessimistic. The first reason is because of the U.S. dollar.
Since the gold standard ended in 1971, gold is no longer the anchor to the global money supply. So in that sense, it’s now just another commodity.
But it’s different from almost any other commodity. Other commodities’ prices fluctuate based on their uses. For example, the price of crude oil could collapse if all cars one day become electric.
But gold doesn’t have much real industrial use. It’s just a globally accepted store of value. So gold’s value depends on the currency it’s valued in, which is the U.S. dollar.
When the dollar is strong in relation to other currencies, the price of gold goes down. And when the dollar weakens, the price of gold goes up.
You can see the inverse relationship in the graph below. As the dollar gets stronger against its primary competitor, the euro, the price of gold falls…
Since the start of 2018, the dollar has been getting stronger thanks to rising interest rates, the booming economy, and the Fed’s decision to stop adding to the money supply.
As a result, gold investors have been getting hammered.
The other reason for the extreme bearishness in gold is because of rising interest rates. As we mentioned earlier, owning gold looks less attractive when you can earn higher yields on bonds.
And finally, we like to own gold during market crashes, but given the all-time highs in the stock market, investors are acting like we’ll never suffer another downturn. They only see smooth sailing ahead. Of course, we know when the memory of falling stocks fade, they’ll come and give you a swift reminder.
Get Protection Now for Cheap
If gold is insurance, remember you need to buy your policy before the disaster. If you wait until the disaster is at hand, your premiums tend to go up.
Let’s recap… You want to own gold for safety… at least a little. It’s a hedge for when the rest of your assets collapse.
The times that it comes in handy – inflation, fear, and low interest rates – all look to be in the offing.
Of course, gold isn’t a productive asset and its performance can cause your portfolio to lag if you buy it at high prices.
But today, you can get gold about as cheap as its been in two years and when its hated by investors. That means you can put on your hedge for cheaper than usual. We think it’s bound to rise whether the market gets a shakeup or not.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig, MD, MBA
Crux note: If you’d like to discover Doc’s quickest, easiest way to add exposure to gold in your portfolio, you NEED to subscribe to his monthly investment advisory – Retirement Millionaire.