Gold Investing Outlook

Gold Investing Outlook

$XAU, $GLD, $GDX, $GOLD, $NEM, $RGLD

After a big letdown from the Fed, it looked like the recent gold price surge would pause to refresh.

Then President Trump took to Twitter the next day and escalated the China trade dispute. The price of gold did not just reverse Fed-induced losses but surged 6% over the next week to a 6-year high above $1,500 oz

Barrick Gold stock rebounded close to a two-year high. Doubts about the economic outlook and especially a Dovish Fed fueled a gold price surge in 1-H of Y 2019. That sparked a burst of interest in gold investing and gold stocks.

After the central bank only came through with a quarter-point Fed rate cut on 31 July, and Fed chief Powell deflated hopes for more easing, .DXY jumped to a 2-year high. 

Gold stocks are usually stock market laggards when the outlook for the US economy and the USD is solid. But economic uncertainty spiked anew on the new Trump tariffs. President Trump Tweeted that he will hit China with 10% tariffs on $300-B in imports on 1 September.

The USD fell and Treasury yields plunged. Then Treasury yields kept falling after China’s RMB Yuan slid to a decade low Vs USD. That raised global growth fears and worries about countries engaging in competitive devaluation.

If countries including the US want a weaker currency, gold stands to be a winner.

Institutional investors like gold as a hedge against uncertain times. After all, gold has proved its ability to hold value over centuries. But does it make sense for individual investors now? Here are some key things to consider when deciding when, whether and how to invest in gold, either via gold stocks such as Barrick Gold (GOLD) and Newmont Goldcorp (NEM) or gold ETFs.

Gold Investing Options: Gold Stocks And Gold ETFs

Gold stocks and gold ETFs are the simplest way for individual investors to bet on a rising gold price. Investing in gold stocks can be a riskier, but also potentially more rewarding, way of investing in the precious metal.

Investors have three major options. They can buy gold stocks individually. They can buy an ETF that tracks the gold-mining stock sector, such as the VanEck Vectors Gold Miners ETF (GDX). Finally, they can get direct exposure to the precious metal itself via the SPDR Gold Shares ETF(GLD).

Well-known gold mining stocks include Barrick Gold stock, Newmont stock, and Royal Gold (RGLD). You can find the Top gold-mining stocks, which are part of the broader Mining-Gold/Silver/Gems industry group, at IBD Stock Checkup.

In a sense, investing in gold stocks or a gold-mining ETF is a leveraged bet that the price of gold will keep rising. That is because a higher gold price can have a dramatic impact on the profitability of gold miners. For example, Newmont said its total cost of production amounted to $907 oz of gold in the first quarter of 2019. That meant increases in the price of gold above that level would go straight to the bottom line.

Corporate leverage works both ways: Falling gold prices can shrink the bottom line in a hurry.

Investing in gold-mining stocks, especially a specific stock, brings in more complications than investing in the precious metal itself. The companies can suffer accidents or production snafus, deplete their reserves or pile up debt.

On the upside, companies can increase mine output, find new reserves, or generate cost savings via mergers or mining productivity gains.

Gold Price History And Real Interest Rates

Adjusted for inflation, the price of gold hit an all-time peak in early 1980 amid double-digit inflation in the U.S. Unadjusted for inflation, the gold price peak above $1,900 0z came in August 2011. That came in the wake of the great financial crisis.

The Fed was engaged in its 2nd round of QE, the 2-year Treasury yield hit historic lows below 0.2%, and .DXY was not far off historic lows after a fight over the debt ceiling nearly led to a US debt default.

The gold price low of recent decades was just above $250 oz in Y 1999. That came as the US economy was still enjoying the upside of the dot-com bubble and productivity was booming.

The common thread linking gold price highs and lows seems to be real interest rates. In Y 1980 and again in Y 2011, real interest rates were negative, with 2-year Treasury yields well below the rate of inflation.

In Y 1999, as the price of gold slumped, real interest rates were on the rise. The Fed was in a rate-hiking cycle, raising its benchmark rate north of 5%, well above roughly 2% inflation.

The Big Q: Why do real interest rates matter so much for the price of gold?

The Big A: Gold is a store of value, but holding it comes with an opportunity cost. That money could instead be invested safely in Treasuries, for example. If real interest rates are attractive, holding gold is much less attractive. When real interest rates turn negative, holding gold is usually a winner.

But real interest rates aren’t the only determinant of the price of gold. The supply-demand balance is among other important factors. For example, central bank sales of gold exacerbated the 1999 gold price slump.

How Gold Stocks Perform Vs. The Price Of Gold

In general, if you think gold is near a bottom and has room to run, history would say you’re better off owning gold stocks than the yellow metal itself. If you think gold could be nearing a tTop, you are probably better off holding gold than gold stocks, based on past performance.

Consider, from the gold price bottom in late Y 2015 through June 2019, the SPDR Gold Shares ETF tracking the commodity’s price rose 31%.

Meanwhile, the VanEck Vectors Gold Miners ETF rose 93% over the same span. That reflects the dramatic corporate earnings improvement thanks to the higher price of gold. Improved earnings, in turn, allow mining companies to increase dividends as the price of gold rises.

Yet gold stock investors can never let down their guard: The descent for gold mining stocks from the Y 2011 price peak was much rougher than for the precious Yellow metal. To the trough in late Y 2015, the gold-tracking ETF tumbled 46%, but the ETF tracking gold miners cratered close to 80%.

The Gold Stock And Gold Price Outlook

The drop in real interest rates due to an abrupt U-turn from the Federal Reserve largely explained the rise in the price of gold in late 2018 and the first half of 2019. The Fed decided that too little inflation was a bigger threat than too much inflation.

Instead of hiking rates, policymakers shifted to Fed rate cuts. The takeaway from the 31 July meeting offered some reason for caution. A divided Fed may be almost as worried about stoking financial excesses as allowing inflation to undershoot the 2% target.

Still, real interest rates are expected to go lower. Soft global growth, undercut by an intensifying China trade dispute, should provide a positive backdrop for the price of gold.

The strength of the dollar also may have an impact on gold prices. Since it’s priced in dollars, gold will tend to rise if the dollar weakens against international currencies. Until recently, dollar strength had been a negative for gold prices, but that’s been overwhelmed by other factors.

Some who see gold as a good long-term investment point to U.S. debt dynamics. Spiraling federal deficits and surging debt levels could force the Fed’s hand. In other words, the Fed might have to keep interest rates low or monetize the debt to avoid a fiscal crisis. That could erode the dollar’s role as the world’s reserve currency.

Yet, no matter your view of whether the price of gold is a good bet, it makes sense to subject investment decisions in gold stocks or an ETF tracking gold or gold stocks, to the same diligent process as regular stock buys. That means waiting for a proper buy signals and points.

Have a terrific weekend

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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