Advertisement

Is this a turning point in gold’s fortunes?

Gold rose by 13% last year. And nobody cared. But sentiment could be about to turn. John Stepek explains what’s going on, and how to invest in a gold rally.

180125-gold-b
Gold will rise again

Last year, gold put in what would have been judged a pretty decent performance by the standards of most other years.

In US dollar terms it rose by 13%. That was its best showing since 2010.

And yet, no one cared for two main reasons.

Firstly, other stuff did better. Secondly, people are still sulking with gold.

Advertisement - Article continues below

But yesterday gold did something unexpected. And it makes me wonder if the mood is turning.

Investors are still wary of gold

Investors have been distinctly unenthusiastic about gold in recent years.

Firstly, it's been outperformed by rival assets. Obviously, there's bitcoin. There is a die-hard group of "goldbugs" who don't like the cryptocurrency with its pretensions to "digital gold" status at all. But there's also a faction who have transferred all of their hard money affections to the hot new thing. So gold just doesn't have the following that it once did.

Then there were plain old stocks. It's one thing to make 13% from gold. But when you could have made the same or more, plus dividend yields, by investing in companies, it just doesn't seem that exciting.

Advertisement
Advertisement - Article continues below

On a second, more important point, the psychology around gold is at a different phase to that around stocks. Shares collapsed in 2008 and started to recover in 2009. The resulting sense of distrust and wariness has only really faded in the last year or so, to be replaced with the "Oh Lord! What have I missed out on?" mania we've seen in the last couple of months.

Advertisement - Article continues below

Gold, on the other hand, fell in 2008 along with everything else, but unlike stocks, that was a blip. It recovered fast, and its bull market lasted until 2011.

The story behind it was simple and its believers enjoyed a sense of moral purity captured by few other investments. Gold was going to be the only remnant of civilisation left (other than cockroaches and tins of spam) when the eurozone finally collapsed, taking what was left of the corrupt global financial system with it.

Society with its unmanageable debts, buy-now, pay-later culture, and crony capitalist ways would forsake its credit-based financial system for the honesty of the gold standard.

In short, if gold was a comic book hero, it would have been Rorschach.

Yet in September 2011, it reached its all-time peak price (of around $1,900 an ounce), and then slowly but surely gave up the ghost. Instead of saving the capital of the righteous, it destroyed it.

Advertisement - Article continues below

That sort of betrayal is not easy to forget or to forgive, even if it does come from an inanimate object. As a result, gold is still very much in "once bitten, twice shy" territory for a lot of investors.

The US Treasury Secretary buries the US dollar

So what was significant about yesterday? The main shift is that gold managed to claw its way above its highest point reached in 2017. That may be meaningful and it may not.

Advertisement
Advertisement - Article continues below

But if you're a fan of technical analysis, it means that gold has challenged a key area of resistance. In other words, it's managed to get back up to an area where in the past it has often ended up being sold. That suggests that sentiment is changing.

The catalyst for this particular rally for gold was US dollar weakness. US Treasury Secretary Steve Mnuchin basically came out at Davos and said that he's pretty relaxed about the idea of a weaker dollar. This has been true of the average US Treasury Secretary throughout much of modern history, but the key is that they don't usually admit it.

Advertisement - Article continues below

Yet, according to Deborah Ball at The Wall Street Journal, Mnuchin said: "A weaker dollar is good for trade. In the longer term, a stronger dollar is a reflection of the strength of the US economy."

As Marc Chandler of Brown Brothers Harriman told the FT: "While Mnuchin was only stating the obvious, Treasury secretaries since Robert Rubin have never really deviated from the strong dollar mantra". The absence of this "strong dollar" mantra means markets automatically assume that the US would prefer "a weaker dollar". Which in turn, is a green light to sell the US currency.

However, it's not just about the weak dollar. It's also about a growing sense that we're in the "late-cycle" inflationary bit of the investment merry-go-round. As Dave Rosenberg of Gluskin Sheff points out, during that sort of period, "gold and oil are the top performers within the commodity group".

How to invest in a gold rally

If you want to get exposure to the gold price, there are various exchange-traded funds (ETFs) that do the job, or you can buy physical gold online or even in person at a bullion dealer.

Advertisement - Article continues below

At MoneyWeek we feel that at least a small proportion of your portfolio should be in physical gold, primarily as an insurance play (it's a good diversifier in that when things go pear-shaped, gold is one of the few things that tends to go up).

But if you're looking for a more aggressive play on the gold rally in other words, we're not talking insurance, we're talking a bet on gold continuing to rise you could invest in the gold mining sector. Indeed, that was my tip for 2018 in our recent forecasts issue of MoneyWeek magazine (if you're not already a subscriber, get your first four issues free here).

For example, the gold producers index in Australia hit its highest level since November 2016 yesterday, notes the FT. Gold miners might not be keen on a weaker dollar, nor on higher oil prices and inflation (they drive up production costs). But following a pretty brutal bear market, miners are more disciplined.

It's inevitable that at some point they will lose this discipline all over again but if the gold price keeps rising, then in the meantime, there could be a solid period of rebounding profitability to buoy their stocks nicely.

Advertisement
Advertisement

Recommended

Commodities look cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Don’t panic about Iran – but don’t sell your gold either
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Here’s how gold could rise above $7,000 an ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Gold is in a bull market – and it could have much further to go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020