Gold Making Headlines Again
Gold is beginning to make headlines once again. Since the start of 2016, gold has been trying to bottom with a series of higher lows. Investors are beginning to take notice and are contemplating whether the worst is over for the precious metals.
Most people think to turn to gold in times of uncertainty but that is not always the case. Gold embarked on a historic rise from 2000-2011 that saw the yellow metal rally from $253 an ounce in late 1999 to $1,924 in 2011. Gold did extremely well during this period of “uncertainty” that saw the tech bubble burst in 2000, 911 in 2011 and the real estate crash in 2008 but suffered greatly after hitting nearly $2000 an oz. in 2011. From 2011 until 2015, gold pretty much went straight down even though there was “uncertainty”; the European financial crisis (PIGS), ISIS’s rise and Russia flexing its muscles on the global stage. So if crisis or uncertainty isn’t always a good determinant on whether gold will perform, what can help investors decipher when gold can be a good complement to an allocated portfolio? The answer could be monetary policy or inflation expectations.
Why is Gold Rallying?
Gold is usually bought as a hedge against inflation. Although current inflation is fairly low, that may be about to change. One of the first places for this to show up could be in wages. Wages have been stagnant for years including the most recent expansion however the continued strength in job creation looks to be driving up wages as there are less qualified people to fill openings. Workers paychecks are showing their biggest gains since the recovery began a decade ago, with real average hourly earnings rising 1.7% year-over-year in January, the best gain since mid-2016. Another area we are seeing some signs of inflation is in rents. Cost of living inputs such as rent is a big component in the inflation data that the Fed uses to base monetary policy. Annual inflation for rents have been running faster than overall consumer-price growth for several years and continue to hold up with four straight monthly increases. Lastly, the Reuters/Jefferies CRB Index is up over 10% so far in 2019 signaling that assets most sensitive to inflation (commodities) are on the rise with oil leading the way. It is a good thing that energy prices cratered in the 4th quarter of 2018 to lighten the overall increase in inflation. However, with oil looking to have found a bottom and the US dollar’s rise looking tired, inflation might be just around the corner which would bode well for further gains in gold.
The US dollar has a big impact on commodity prices and inflation. Commodities are priced in US dollars so expect them to move in the opposite direction. The US dollar has been rallying since mid-2011 pressuring commodities and gold. The most likely reason is because the Fed ended its Quantitative Easing (QE) program late that year which acted to tighten monetary policy, making the dollar look more attractive. In addition, Europe has been trying to fight off its deflation with low rates which has strengthened the US dollar even further. This pressure forced the Fed to talk down the US dollar and calm global stock markets at its January 2019 meeting by saying there would be fewer rate hikes this year than the market previously anticipated. The markets embraced this change of heart and all assets (including gold) have rallied strongly in anticipation of faster growth and higher possible inflation.
What to do?
If after making a determination on inflation and the US dollar, you feel gold has a place in your portfolio, there are several ways to get exposure. You could buy the real thing from a dealer. You could buy an ETF (Exchange Traded Fund) that tracks the price of gold. You could even buy a gold stock that mines gold.
There are advantages and disadvantages to them all.
Depending on your risk tolerance, gold could make up anywhere between 3-10% of your overall portfolio. It is wise not to allocate much more than that because the world is only going to end once and how are you going to collect if it actually does? We have all seen the TV commercials, “The world is ending – buy gold”. Unfortunately for people that heeded that advice during the past 7 years, the world is still here and they may have losses. Although no one knows if gold will get back to the all-time highs near $2000, the landscape may be changing for further gains in gold with low rates, easy money and increasing inflation being the main drivers.
“When paper money systems begin to crack at the seams, the run to gold could be explosive.”– Harry Browne
Total Investment Management, Inc. offers this commentary strictly to educate, inform and share our thoughts on the markets. Nothing here should be construed as investment advice. Past performance is no guarantee of future results.