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Investors are “Going for the Gold”



Investor doubts about the economic outlook and especially a Dovish Fed drove a gold price run in 1-H of Y 2019, sparking  burst of interest in gold investing and gold stocks.

The escalating China trade dispute has provided the fuel since 1 August, and a day earlier, the Fed dampened expectations for more rate cuts, sending the price of gold South to $1,412 oz.

Then on 1 August President Trump took to Twitter, announcing new tariffs on more Chinese imports.

In the near term, the gold price may mirror the course of the China trade dispute, rising as it intensifies and backing off if cooler heads prevail. So, if countries including the US want a weaker currency, gold stands to be a winner.

After the Fed only came through with a 1/4 pt rate cut on 31 July, and Fed Chairman 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 USD is solid. But economic uncertainty spiked anew on the new Trump tariffs.

Institutional investors like gold as a hedge against uncertain times.

As gold has proved its ability to hold value over centuries.

The Big Q: 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 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 3 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) or
  • 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).

Investing in gold stocks or a gold-mining ETF is a leveraged bet that the price of gold will keep rising. And I have said this before, 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 Q-1 of Y 2019. That meant increases in the price of gold above that level would go straight to the bottom line. In a sense it is like buying the precious Yellow metal at a discount.

Corporate leverage works both ways, as alling gold prices can shrink the bottom line.

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.

Adjusted for inflation, the price of gold hit an all-time peak in early Y 1980 amid double-digit inflation in the US.

Unadjusted for inflation, the gold price peak above $1,900 oz came in August 2011, in the wake of the great financial crisis. The Fed was engaged in its 2nd round of QE’ing, the 1-year Treasury yield hit historic lows below 0.2%, and .DXY was just off historic lows after a fight over the debt ceiling nearly led to a US debt default.

Gold is a store of value, and 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.

Real interest rates are not the only determinant of the price of gold. The supply/demand balance is among other important factors.

So, if you think gold is near a bottom and has room to run, history would say you are better off owning gold stocks than the precious Yellow metal itself.

If you think gold could be nearing a Top, you’re 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 frame. 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. To the trough in late Y 2015, the gold-tracking ETF dove 46%, but the ETF tracking gold miners crashed to 80%.

The drop in real interest rates due to an abrupt U-turn from the Fed largely explained the rise in the price of gold in late Y 2018 and 1-H of Y 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 FOMC meeting offered some reason for caution. A divided Fed seemed almost as worried about stoking financial excesses as allowing inflation to undershoot the 2% target.

But, the Fed has little choice but to keep cutting as long-term yields flirt with historic lows. Soft global growth should provide a positive backdrop for the price of gold.

The strength USD also may have an impact on gold prices. Since it is priced in USDs, gold will tend to rise if USD weakens Vs international currencies. Until recently USD strength had been a negative for gold prices, but that has been overwhelmed by other factors.

Some who see gold as a good long-term investment point to US 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 USD’s role as the world’s reserve currency.

So, 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 rigorous process as regular stock buys. Do your homework, and then make the move.

Stay tuned…

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