Against growing crude prices gold is significantly cheap and presents a good buying opportunity, according to Leigh Goehring, managing partner at New York-based firm Goehring & Rozencwajg Associates.
The analyst compared the current situation to the one gold and oil markets experienced 20 years ago. “Back in the first quarter of 1999 oil was $11 a barrel, gold was almost $300. So an ounce of gold bought 30 barrels of oil, which at our long-term modeling of golden oil that made gold very-very expensive,” Goehring said in an interview with Kitco News.
The expert highlighted that back then prices for crude went all the way up to $35 within 18 months, whereas the precious metal went from $300 down to $250.
“At the end of 2000 oil was at $37, gold had fallen down to 275, and at that point an ounce of gold only bought seven barrels of oil. It became radically undervalued,” he told the media. “And what had happened over the next two years? Gold stocks were up 500 percent in the next three years and oil stocks did almost nothing.”
“Oil will continue to do well. If oil were to go to $100 a barrel and gold were to stay at these levels, we’re getting down to that undervalued area of 10 to 1, where an ounce of gold only buys 10 barrels of oil. At that point I believe gold will be radically undervalued and will take off,” Goehring said.
According to the analyst, interest rate hikes shouldn’t be an issue. “If you look historically, whether it be the great gold bull market in the 1970s, or the bull market last time, both of them occurred during rising interest rates,” he said.
Goehring said he wasn’t surprised that the gold market didn’t react to Donald Trump’s hardball talk on Iran nuclear deal. “I think that the biggest effect of the whole Iranian re-imposition of sanctions is going to affect the oil market,” he said. “It will lead to further upward pressure in oil prices.”
The expert believes that the bull market in gold, which hasn’t started yet, still has a little bit of a trading characteristic about it for the next six months or so.
“I think we have not started the bull market in gold and I think that what we have to have is some sort of undervaluation of gold take place, and I think that the undervaluation is going to surround the price of oil,” he said, adding that the experience of 1998-2001 is currently repeated in the oil market and the gold market.
Gold, which is traditionally seen as a safe haven, is usually subject to the whims of supply and demand. Its value changes quickly, pushing the bullion price to extremely high levels at times.
The yellow metal also makes a habit of performing poorly when the stock market is doing well. But gold is the ultimate store of value, according to precious metals expert Ronan Manly of Singapore’s BullionStar.
“What this means is that gold retains its purchasing power over long periods. Gold’s purchasing power is not eroded by inflation as it is an inflation hedge,” the analyst told RT. “In contrast, fiat currencies such as the US dollar are not stores of value. Fiat currency purchasing power is consistently eroded by inflation, and over time fiat currencies, such as the US dollar, lose nearly all of their purchasing power relative to gold.”
Widely accepted as a safe haven, gold is commonly seen as financial insurance in times of crisis, conflict or war, with investors rushing to the asset during these periods, according to Manly. He compares the precious commodity to a “safe harbor when there is geopolitical turmoil.”
The expert points out that the physical commodity has a low correlation with the prices of other financial assets and securities, as it is less impacted by business and macro-economic cycles compared to most other assets.
“Gold therefore also aids portfolio diversification since by adding an investment in gold to an existing portfolio of other assets such as stocks and bonds, the overall volatility or risk of an investment portfolio can be reduced while boosting portfolio returns,” Manly said.
Accept no paper substitute: Buy physical gold
The research analyst stresses that the best way to invest in the precious asset is to buy physical gold as opposed to gold-backed exchange-traded funds (ETFs) or gold futures. “Physical gold has a limited supply unlike fiat currencies
According to the expert, gold-backed ETFs only provide exposure to the gold price and not to gold. Unit holders of gold-backed ETFs are shareholders, not gold holders. Gold-backed ETFs are also complex trusts or securitized products, where the trust owns the gold, and there are many moving parts and a lot of counterparty risk to the various entities-backed ETFs, there is also no option to take delivery of the underlying gold or to convert the units or shares into physical gold.
The expert adds that the advantage of physical gold is that it is portable and anonymous, difficult to counterfeit, cannot be debased and is highly stable to counterparty risk or default risk since it’s not issued by any corporation, government, central bank or other entity.
“It’s also portable across international borders and due to the universal acceptance of gold around the world, the gold market is highly liquid and gold bars and coins, as long as they are recognized as being fabricated by well-respected mints and refineries, can be sold in almost any city in the world so as to raise cash at any time,” Manly said.
According to the precious metals expert, physical gold is beyond the banking system and ring-fenced from financial repression, as well as from the risks that are essential for the current global monetary system.
“So if you want wealth preservation that is outside the banking system and that doesn’t have any counterparty and no contract or entity that can default, then you have to choose physical gold or at least something that has a direct claim on allocated physical gold,” concludes Manly.