Making the Case for Gold: 10% Gains Since Summer Are Just the Beginning
Monday brought word that the Chinese central bank added to its gold reserves for the first time in more than two years.
Now, this isn’t necessarily big news. But it’s more support for an upswing in gold that’s quietly been taking place since summer.
Today, let’s talk about this gold upswing and whether it might be time to consider a gold trade. After all, history has shown that when this precious metal takes off, it can mean huge returns.
***Gold’s traditional value — the ultimate chaos hedge and wealth preserver
Before we dive into recent market action, let’s get on the same page.
You students of history know that gold is really just another form of money. Forget the rings, necklaces, and earrings. When you boil it down, gold is simply an alternative currency.
Over the years, it has developed a reputation as a “safe haven” asset. In other words, when riskier markets (like stocks or fiat currencies) crash, people flock to gold to protect their wealth.
In this way, gold’s main role in a portfolio is as a chaos hedge or wealth preserver. This means investors don’t typically buy gold for the long-term (think many decades) believing they’re going to see explosive gains.
But don’t make the mistake of thinking this means gold can’t post huge returns over shorter periods …
***Gold’s massive run from 2002 through 2012
For example, on December 31, 2001, gold was trading at about $280. As you can see below, it had been losing value over the preceding seven years.
But then gold made its move. Fast-forward about 10 years and it peaked at roughly $1,890 in 2011.
That’s growth of about 575%. Gold mining stocks saw even bigger gains. From the 2000 low to the 2011 high, gold mining stocks, as measured by the Gold Bugs index, climbed 1,500%.
The point is that for a “safe haven” asset, gold can still make investors big money when the right forces come together.
***So, where is gold now? And are these “forces” setting up for more gains?
Gold peaked in 2011 then lost roughly 35% over about two years. It then began trading sideways, or “sawtoothing.” Sawtoothing is when lots of the price-excess from the preceding bull drains out of the market. This happens as investors who still hold the asset grow impatient with it not going anywhere. They finally give up and sell out. Often, this sawtoothing sets the stage for the next big move higher.
As you can see below, gold’s sideways action means it’s trading today about where it was in summer 2013.
But let’s zero in now. Below is gold’s chart since August …
It’s up nearly 10% with much of that coming in the fall as scared investors sold stocks and rotated into gold in hopes of protecting their wealth.
***But what now? Are gold’s gains done?
Let’s discuss two variables affecting gold’s price: interest rates and the U.S. Dollar.
Typically, rising interest rates push down gold’s price. That’s because rising rates mean investments that pay interest become more attractive (relative to gold that doesn’t spin off any cash flow). In this way, there’s an opportunity cost to investing in gold when rates are rising.
As you know, the Fed has been raising rates. There were four hikes in 2018. And since the Fed began raising them three years ago, there have been nine in total. Translation — hard on gold.
But just last week, Fed Chairman Powell signaled the Fed may slow (or even be done with) rate hikes in 2019.
Here’s what Louis Navellier wrote on Monday to his Accelerated Profitsreaders about potential hikes …
” … Fed Chair Jerome Powell admitted that falling market rates could impact the direction of Fed policy in 2019. Remember, the Fed never fights the tape, so current Treasury yields are forcing the Fed to take a step back from key interest rate hikes.“
If the Fed does step back, it could be a big tailwind for more gold gains. And if the Fed lowers rates as some are suggesting, it could lead to a major move for gold. So far, the edge goes to “more gold gains to come.”
But then there’s the U.S. Dollar …
Gold and the Dollar tend to have an inverse relationship. When one increases in value, the other usually decreases. You can see this in the chart below dating back to summer 2015. It shows DXY (the U.S. Dollar Index) in blue and the gold ETF, GLD in red. Notice how they move opposite of each other.
Look at spring 2018. Beginning then the Dollar strengthened. And in the usual inverse way, gold began falling. But then, starting last summer, both gold and the Dollar began rising.
What do we make of this?
One could argue that gold’s ascent was based purely on soft global economic data and stock market jitters. Therefore, if stocks continue to stabilize now, gold’s “safe haven” status won’t be necessary, so gold will drop.
On the other hand, some analysts expect this soft economic data from around the globe and the U.S. will lead to a recession in 2019 (or earnings weakness). That would lead to more gold gains.
So, clues from gold’s relationship to the Dollar are a bit murkier. Given this, let’s look at a third, short-term variable.
In the chart below, notice GLD’s RSI level. “RSI” stands for “relative strength index.” Levels above 70 typically mean an investment is overbought. A sell-off may be likely to follow.
You’ll see that GLD’s RSI was recently above 70. As of the time of this writing, it’s dropping, reflecting the falling price of GLD. Now, this indicator is certainly not infallible, and can change quickly. But it’s indicating downward pressure on gold’s price — at least, for the moment.
So, what’s the takeaway?
***Greenlight for a long-term gold investment, yellow light for a short-term trade
As the 2002-2011 rally showed, the metal can skyrocket, making the 10% move to date just the start. And as we discussed, slowing rate hikes and the threat of a weakening global economy may prove to be major long-term growth drivers. Plus, gold has been sawtoothing for years, so there’s plenty of room for gains far greater than 10%.
Finally, demand for gold from central banks around the world isn’t slowing. After a hiatus of more than two years, China just raised holdings to 59.56mn ounces. Russia bought another 1.2mn ounces during November. And in September, India bought gold for the first time in nearly a decade. In fact, according to a recent survey from the World Gold Council, 18% of central banks polled plan to increase their gold holdings over the next 12 months. None planned to sell.
Despite this longer-term support for gold, in the short-term, prices could see downward pressure …
GLD’s down-trending RSI indicator, optimism about the US/China trade talks (which, if successful, would lure investors out of “safe haven” investments), and a stock market that seems to be picking up steam again are all gold headwinds. So, if your typical trade length is only a few weeks or months and you get into a short-term trade today, the factors above might put you underwater for a bit.
Either way, as a starting point for your own research, look at “GLD.” It’s the Spider Gold Shares ETF.
Also look at “GDX,” the VanEck Vectors Gold Miners ETF. Be more careful with GDX. Miners are more volatile than pure-play gold. For example, while GLD is up about 10% since the summer, GDX has gained nearly 20%. But that cuts both ways — if gold pulls back, GDX is likely to see bigger losses.
We’ll continue tracking gold and let you know how this plays out.
Have a good evening,
P.S. Where should the savvy investor look for performance in this market?
Legendary investor Louis Navellier believes this year’s tax reform law will cause an avalanche of money to rush into the markets in the coming months.
In his Growth Investor newsletter, he’s recommending that his readers buy specific dividend stocks that are positioned to take advantage. To learn more about the dividend stocks he is recommending for immediate purchase, check out Louis’ critical report here.