Gold is a frustrating investment, even for its proponents. Actually, “disciples” is probably a better a better word for the truly-committed gold investor. More than any other asset class, gold tends to create a quasi-religious cult around itself. Investors might buy stocks, but they believe in gold.
Unfortunately, gold is often the god that failed. It is billed as a “crisis hedge,” and in the lead-up to a crisis, tends to do well. But when the crisis actually hits, gold tends to behave like any other traded risk asset.
This is more true today than in years past because of the popularity of gold ETFs like the SPDR Gold Trust (NYSE:GLD) and other exchange-traded options favored by hedge funds and retail investors. Gold has become more correlated to the stock market because now gold is the stock market.
As an “inflation hedge” or “currency hedge,” gold tends to hold its ground a little better. But during times of macroeconomic stability, it often loses its appeal.
As you might have guessed by now, I’m not the biggest fan of gold, particularly as a long-term investment. It’s difficult for me to like an asset that pays no interest or dividend and has little real industrial value. Your return on a gold trade is purely dependent on your ability to sell it to someone else at a higher price, and that bothers me.
If you buy an income-producing asset — be it a stock, bond, rental real estate, mineral rights, oil and gas royalties, a small business, etc. — you can realize a return irrespective of Mr. Market’s mood that day.
That said, gold can be a profitable trade if you are able to maintain your objectivity and not get wrapped up in the cultish ideology that tends to surround the barbarous relic.
All else equal, I would expect gold to perform well under the following set of circumstances:
- Loose monetary policy,
- Neutral or bearish sentiment among individual investors, and
- Fear of a crisis, but a small likelihood one will actually hit.
Today, Condition 1 certainly holds. The Fed is experimenting with the loosest monetary policy in history. Just this week, Bernanke announced that “QE Infinity” was being expanded beyond the original $40 billion per month in mortgage securities to include another $45 billion in Treasuries … and that short-term rates would be held at virtually zero until the unemployment rate dipped below 6.5%.
Condition 2 is a little hazy. Gold sentiment reached what I would call (in professional terms, of course) the “nutty loony” phase of bubble sentiment about two years ago; gold was all anyone wanted to talk about. Since then, it’s settled down. I wouldn’t call sentiment towards gold bearish by any stretch, though; this week The Financial Times reported that sales of American Eagle gold coins soared by 131% in November as investors feared the worst from renewed government gridlock and the ballooning debt. But I would say that sentiment is on the slightly-bullish side of neutral.
I expect to get a little hate mail for my views on Condition 3, but I do not see any major crises hitting in 2013.
I know, I know, there is the fiscal cliff issue … and the possibility that Europe might blow up … or that the recovery in China misfires … or that Japan’s day of reckoning finally comes.
Any of these could happen, and the fear that they might happen is bullish for gold. But I’m betting that the fiscal cliff crisis gets resolved by early January, that Europe muddles through and that Japan’s day of reckoning is still a year or more in the future.
While I have laid out a modestly bullish case for gold over the next 6-12 months, I still don’t recommend it for most investors. I see gold drifting higher in 2013, but I expect several other asset classes to perform much better. With domestic energy production booming and interest rates near the lowest levels in history, I expect to see Master Limited Partnerships enjoy a monster rally.
I also expect European and emerging market stocks to have a good run, while U.S. stocks should have some life left in them too.
Gold will probably outperform bonds, but at current yields, begging with a soup can in front of the subway will probably be more profitable than investing in bonds too.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
