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Is the Gold Trade Dead?

Image: Is the Gold Trade Dead?

(AP/Josh Edelson)

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Thursday, 01 Dec 2016 03:29 PM Current | Bio | Archive

Last week, a rallying stock market and declining gold prices led to an interesting intersection: both assets reached the same percentage gains for 2016, at around a 9 percent positive return.

That means stocks are on track for a slightly better than average year. And gold, after 5 years declining, is looking to at least post a gain. But that gain is much smaller than expected. At the end of the first half of 2016, the yellow metal was up closer to 30 percent.

So, is the gold trade dead? In the short-run, perhaps. But the long-run rationale for owning gold got a huge shot in the arm.

Why do investors own gold? For a few reasons, but the two key ones are political uncertainty and unexpected inflation.

Political uncertainty came off the table a few weeks ago with the election results. While the metal initially rallied overnight on the election news, prices instead have slid throughout the month of November. Stocks, which were supposed to decline on fears of a Trump presidency, have rallied instead.

This trend won’t last forever. Getting faster economic growth will prove difficult without bringing around inflation, that other factor that tends to bode well for the price of gold.

Trump’s plans to cut taxes, spend upwards of $1 trillion on infrastructure, and rebuild America’s crumbling inner cities sound like the kind of policies that, if fully enacted, will increase our deficits even more. It could also mean a lot more money flooding directly into the economy.

Think about it this way: most inflation is monetary. The Federal Reserve lowers rates, which should induce borrowers to take on loans, refinance mortgages and lease a car. But if borrowers don’t want to borrow, the Fed can’t do much to make that happen. At that point, they’re pushing on a string. To some extent, that’s been the case since the financial crisis 8 years ago. The Fed can have some impact, but without borrowers willing to take on more debt, the economy won’t expand as fast as it could.

So instead of monetary policy trying to move the needle, next year we’ll have fiscal policy to do the job instead. If government spending expands but taxes drop, it could create a one-two punch that gets the economy moving again—but in so doing, inflation will likely rise as well.

Again, that’s good for gold. When inflation expectations start to rise, so do gold prices. As a result, I’d view the metal’s drop since the election as an opportunity to start buying more.

Remember, you should own some physical gold as part of a broad investment strategy. At the very least, physical gold acts as an alternative holding to cash. It’s your insurance against some kind of systemic financial crisis in the dollar or paper currencies in general. It’s also a solid way to hedge against inflation.

Whether you already own physical gold or not, I’d suggest putting aside a regular amount of money on a monthly basis and then buying when you have enough set aside to pick up a quarter ounce of the metal or more. That way, you’re treating your gold investment just as you would any other insurance premium.

But let’s say you want to get a little more aggressive. Not to worry, thanks to gold’s sharp decline in recent weeks.

At today’s prices, many of the gold mining companies are starting to look interesting again after a substantial rally in the earlier part of the year. While many gold mining stocks are substantially off of their lows, they’re now also well off their highs. Within the gold mining space, I’d start with companies like Royal Gold (RGLD) or Silver Wheaton (SLW).

These companies are royalty companies. They provide capital to mining projects up front, and in return get a fixed amount of gold or silver at a price that’s well below the market price once the mine is up and running. These companies held up much better than common mining stocks during the recent half-decade bear market in gold.

Those are the companies worth looking into now. As for the rest of the mining sector, it might be better to hold off a few weeks or months until gold’s recent decline fully runs its course. You’re better off waiting for gold prices to move upward before buying most gold companies rather than try to grab the bottom, although you’ll likely to fine over time with the royalty companies.

Following the royalty firms are the major mining names like Goldcorp (GG) or Newmont Mining (NEM). From there, the sector runs all the way down to micro-cap names representing mining rights without so much as a drilled hole in the ground. Again, most of these companies will follow the price of gold. That’s why it’s critical to wait for gold prices to rise before looking into the sector beyond physical gold and the royalty companies.

Again, the rationale for gold here is that prices have dropped over 15 percent within the past month following the election. And while political uncertainty is now off the table, it seems likely that we’ll be facing higher inflation in the future as a result of more fiscal spending by the government. It will likely even exceed monetary policy as the tool to stimulate economic growth.

In that case, the prudent investment move now is to take advantage of gold’s decline to pick up more of the physical metal for insurance purposes. And, should prices continue to slide, start buying the relatively stable royalty companies. When inflation unexpectedly kicks up, that’s the time to start buying the common mining stocks.

We’re only a few weeks away from the election, yet this is shaping up to be one of the more interesting possible investment opportunities as a result. That’s especially true with most stocks rallying to new highs. We’ll see how this opportunity unfolds in the coming weeks and months, but gold’s decline seems to have been too big, too fast. At the very least, it’s an opportunity to buy more physical gold, just in case.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.

© 2017 Newsmax Finance. All rights reserved.

 
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Last week, a rallying stock market and declining gold prices led to an interesting intersection: both assets reached the same percentage gains for 2016, at around a 9 percent positive return.
gold, trade, invest, trump
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2016-29-01
Thursday, 01 Dec 2016 03:29 PM
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