Gold has lost some luster in recent months … does the vaccine news hurt the likelihood of future gains? … what Eric Fry has to say about this “Trade of the Decade”
Several recent pieces of nerve-calming news would seem to be bad for gold — an asset thought of as a chaos hedge.
First, Pfizer just announced a vaccine that is reportedly more than 90% effective against COVID-19.
Second, barring anything crazy regarding litigation, the “who will take the White House?” drama is behind us.
And third, over the last week and a half, stocks have enjoyed a strong upward move as money managers have rotated into value stocks, anticipating an economic recovery.
While all of this appears great for stock investors, it seems like a series of warning signs for gold bugs.
So, is it time to bail on the gold trade?
After all, as you can see below, after setting a new, all-time high back in August, it’s been steadily drifting lower.
That’s the question our macro specialist, Eric Fry, answered in his most recent issue of Smart Money.
Today, let’s peek over his shoulder to see what to do about the yellow metal.
***Don’t be so fast to dismiss the “Trade of the Decade”
For any newer Digest readers, Eric is our global macro specialist. This means he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities.
Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity.
It’s been a powerful market approach …
In his decades in the business, Eric has dug up more 1,000%+ gaining investments than anyone we know of in the investment newsletter industry.
And in recent quarters, he’s been using gold and silver to help his subscribers pocket triple-digit returns.
For example, in early August, he recommended his Speculator subscribers sell partial positions in three gold and silver mining stocks for gains of 155%, 160% and 340%.
But back to the question at hand …
With an effective vaccine apparently in the works and various clouds overhanging the market now parting, is the chance for more gold-profits done?
Let’s jump straight to Eric’s most recent issue of Smart Money:
I understand why you now may be questioning my gold call.
After all, the market jumped higher (on Monday), with both the Dow Jones Industrial Average and the S&P 500 Index both setting new intraday highs.
And all that confidence pushed down the value of safe-haven assets like gold, which dropped more than 4% (on Monday). Good news means rising stocks means falling gold, right?
Not so fast.
I’ve said here before that I expect the gold price to double over the next two or three years, and I’ve also told you that gold will win out over the dollar.
And yesterday’s news changes none of that.
Well, because the genie has already been let out of the bottle, so to speak.
And in this case, that genie is the world’s central banks and their printing presses.
Back to Eric:
Because of the COVID-19 pandemic, the world’s governments and central banks are pledging virtually unlimited resources to combat a recessionary fallout.
As we’ve noted before here in the Digest, governments around the world have unleashed at least $15 trillion of stimulus money via bond-buying and budget spending.
According to French investment bank Natixis, the amount of global central bank money will increase more in 2020 than it has over the last 20 years — and that includes the 2009 crisis.
Natixis predicts the cash supply of major central banks is going to increase by 70% here in 2020.
Overall, experts predict that by the end of this year, we may see the global debt-to-GDP ratio rise to 342%.
So, we might have an effective vaccine? And money managers are bullish on stocks?
Wonderful, but that doesn’t magically sop up the trillions of new currency now sloshing around the globe.
***The tailwind of another round of stimulus
In Eric’s update, he reminds readers of the bull market in gold that followed Federal Reserve Chairman Ben Bernanke’s “quantitative easing” (QE) program beginning in late 2008.
In short, the Fed conjured dollars from thin air and then used those dollars to buy Treasurys and mortgage-backed securities in the open market.
Eric notes that this was simply a new twist on an old tactic called “money printing.”
As such, this program undermined the dollar’s value to some extent and boosted the value — and appeal — of gold.
Even though the precious metal was trading near a record high in early 2009, it would double over the next two years thanks to the flood of QE dollars.
It appears history could be about to repeat itself …
Back to Eric:
… part of (gold’s recent new, all-time high) is thanks to aggressive QE from central banks all over the world and trillions of dollar of debt-financed rescue packages and stimulus measures.
Under Federal Reserve Chair Jerome Powell, our own central bank spent $2 trillion in just five weeks in late April and May.
This is 2009’s QE on steroids.
The dollar may have bounced on news that fiscal stimulus from the U.S. government is stalled thanks to political gridlock, but neither side of this political fight has walked away from the negotiating table yet.
Another round of deficit spending could supercharge the gold rally, pushing it toward $3,000 per ounce — maybe even before 2020 ends.
News from yesterday is that republican and democratic lawmakers have returned to the negotiating table to try to pass another stimulus package before the end of 2020.
The Senate is back in session this week and is restarting talks around another stimulus relief package, with the goal of passing a bill by the end of 2020 …
“Our work is not finished,” Senate Majority Leader Mitch McConnell said on Monday. “The Senate’s going to have a busy few weeks.”
***And let’s not forget our zero-interest rate environment … which actually means negative real rates
The Federal Open Market Committee (FOMC) slashed the overnight interest rate to near zero in March.
Historically, low-rates are very bullish for gold. This is because rate-sensitive income investments lose much of their appeal over gold when they’re paying investors practically nothing.
And it gets better for gold investors …
This 0% interest rate is the nominal rate — not the “real” rate.
To make sure we’re all on the same page, the nominal rate of return is the face-value rate that investors earn on an asset. This is different than the “real” rate of return, which subtracts inflation from the nominal rate.
The real rate is what matters since inflation has a very real impact on the purchasing power of your dollars.
Back to Eric:
… every Treasury security, from the three-month T-bill to the 30-year bond, is paying a rate of interest that is less than the inflation rate.
That means these securities are paying negative real interest.
You can see this for yourself by looking at the inflation-adjusted 10-year Treasury below.
As I write, its inflation-adjusted yield is -0.82.
In other words, investors’ purchasing power is being eroded by holding the 10-Year.
Here’s Eric for the takeaway:
This isn’t likely to change anytime soon, and that means that gold isn’t going to lose its appeal anytime soon …
***Gold has taken a few bruises, but the Trade of the Decade is still very much in play
As Eric wraps up his Smart Money issue, he writes that both politicians and the Federal Reserve will be providing tailwinds to the gold market as we head into 2021.
Those same tailwinds will likely propel stocks higher as well … at least at first. They may even act together with the vaccine-related bullishness, giving some investors bigger returns.
But then, gold might actually have an advantage over stocks.
Here’s Eric for more:
… as the stock market moves deeper into this next decade, it may encounter the powerful headwind of high valuations.
The U.S. stock market isn’t cheap, at least not based on traditional market metrics.
But this recent rally has made gold significantly cheaper as investors who don’t understand what’s going on move their money into riskier assets like stocks.
So, as we wrap up, is the gold trade over?
The macroeconomic winds blowing across global markets today mean more gains are coming.
Here’s Eric’s final take:
Because the underlying conditions that make gold so strong haven’t changed, I think it’s worth buying this dip … and any other dips that come along as we get more vaccine news that gooses stocks and dings gold.
Have a good evening,