Hello, Reader.

In the play The Merchant of Venice, William Shakespeare wrote the phrase, “All that glisters is not gold.”

This phrase – although now used with the word glitters – warns that someone, or something, may not actually be as valuable as it first appears.

But gold itself should be considered in this way, especially as in investment. Is gold really as dazzling as it appears?

I say, not so much.

Gold is not an investment in the classic sense of the word; it is a cult leader.

The faithful trust their leader to deliver them from financial evil. The rest of us aren’t quite sure what to do with this shiny, mystical metal.

It defies traditional investment calculations. Excel spreadsheets are useless. “Gold is no investment,” the financial writer James Grant once observed. “Gold is the refuge of the wary.”

The decision to buy gold relies more on ancient tradition than clinical financial analysis, which is why I rarely risk issuing gold-related recommendations.

That said, gold and gold stocks sometimes offer wonderful trading opportunities. On occasion, the stars align so completely on this mystical metal, that a compelling speculation presents itself…

From Pricey to Pricier

In no particular order, the gold price will likely benefit from…

• Falling Interest Rates: The gold price almost always rises when interest rates trend lower. Most recently, the gold price rocketed higher from 2001 to 2011, when the Fed was systematically suppressing rates. Then again, the gold price soared during the pandemic when the Fed was holding rates close to zero.
• Weakening Dollar: Because interest rates are falling, the dollar exchange rate might also drift lower. A weak dollar usually manifests itself as a strong gold price.
• Rising Geopolitical Tensions: Almost nothing benefits from geopolitical tension or wars other than weapons manufacturers… and gold. Hopefully, the current tensions around the world moderate throughout the year. But the mere possibility of growing instability could support a strong gold price.
• Central Bank Buying: On a net basis, the world’s central banks have become large, consistent gold buyers. In 2022, they bought more than 1,000 metric tonnes – equal to more than one-quarter of the world’s annual gold production. Central bank buying, by itself, will not trigger a major gold rally. But that buying could help power a rising price trend.

In general, gold stocks are not particularly cheap. But somewhat like my expectations for corporate profit margins, I’m expecting gold stock valuations to move from pricey to pricier, as the year progresses.

A Time for Everything

Remember, gold is not an investment in the traditional sense. It is not an operating business and will never generate earnings growth or pay a dividend. Gold is, as Warren Buffett famously stated, “forever unproductive.”

Further, the Oracle of Omaha declared…

[Gold] will never produce anything… Gold has two significant shortcomings, being neither of much use nor procreative. This type of investment requires an expanding pool of buyers who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.

All true.

But as the writer of Ecclesiastes observed, “There is a time for everything.” In fact, as recent history proves, there is even a time to favor “non-procreative” assets over procreative ones… like the 10-year stretch from 1999 to 2009.

During that decade-long span, non-procreative gold advanced 230%, while Berkshire Hathaway shares fell 6%!

Although I’m not expecting gold to deliver relative gains of this magnitude, select gold mining stocks could produce handsome results this year.

Regards,

Eric