Time for Gold to Shine

Gold stocks

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  • Gold has a reputation among many investors. Some investors view the metal as a hedge against a crisis. Others view the investors who look at gold in that way as “gold bugs” and consider them to preparing for a scenario that is unlikely to unfold and therefore missing gains in other markets.

    The truth is that both sides of that debate are probably wrong. There may be times when gold is an excellent investment and there may be times when gold is not a good investment. Since gold can be readily traded in the futures markets, traders can easily benefit from up or down moves.

    But, when gold does move in a bull market, at times it has even outperformed stocks which are often considered to be the ideal long term investment. While opinions can be strong in the markets, they should always defer to data and the chart below shows some interesting data related to gold.

    20 year returns by asset class

    Source: Morgan Stanley wealth Management

    Over the twenty year period ending in 2017, gold beat U. S. stocks, international stocks, bonds and real estate. That’s the kind of performance that deserves consideration.

    Gold In the Short Term Requires More Analysis

    Now, a twenty year period is an impressive run, but the truth is that gold has underperformed over other twenty year periods. Gold has also underperformed over the past five years as the chart below shows.

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  • GLD monthly chart

    This is a chart of the SPDR Gold Trust ETF (NYSE: GLD) which is about 30% below its 2011 high. This is an exchange traded fund that makes it possible for individual investors to easily buy and sell gold. The price of GLD is equal to one tenth of an ounce of gold. The ETF can be bought and sold in an ordinary brokerage account.

    However, GLD may be taxed differently than other investments. Gains or losses may be taxed as collectibles rather than receiving traditional capital gains treatment and this should be a factor you consider before investing in GLD. You should consult with your tax professional for guidance.

    If GLD is not attractive to an investor based on taxes, gold mining ETFs such as VanEck Vectors Gold Miners ETF (NYSE: GDX) could be considered as an alternative.

    In the chart, we can see that GLD has been trading within a relatively narrow range for about five years. This is an example of a pattern technical analysts call a basing pattern. Bases can set the stage for a large price move.

    As the base forms, bulls and bears are in relative balance. They are establishing positions while waiting for a significant breakout. When the breakout occurs, some will be wrong, and others will be right. Traders on the wrong side of the market may reverse positions, reinforcing the new price trend.

    Many analysts believe gold could be set to break out to the up side.

    The Bullish Case for Gold

    Barron’s recently noted, “Lower prices have contributed to a boost in global central bank purchases of gold. Other signs of a potential bottom for the metal include recent consolidation in the metals mining sector, which can mark a turnaround for the market

    “I do believe gold has either reached a floor or is pretty close to one,” says Jeff Wright, executive vice president of mineral exploration company GoldMining (ticker: GOLD.Canada), noting that central bank gold reserve purchases were the strongest in three years.

    Central banks didn’t buy more gold just because of the price decline. “Questions on U.S.-China trade ramifications [and] Brexit” helped boost demand for haven gold, says Wright.

    The preliminary U.S., Mexican, and Canadian agreement recently announced should also temper the U.S. dollar’s strength, which may ease pressure on dollar-denominated gold prices, he says.

    Global central banks added a net total of 193.3 metric tons of gold to their reserves in the first six months of this year, up 8% from 178.6 metric tons in the same period a year earlier, according to the World Gold Council, or WGC.

    That marked the strongest central bank gold purchases in the first half of a year since 2015. Poland, in particular, grew its gold reserves by 1.9 metric tons in July and by 7.5 metric tons in August, WGC says.

    Those are not large amounts, “but normally, European central banks sell gold, not buy it,” strategists at Macquarie wrote in a September note, adding that this would mark Poland’s first gold purchase since 1998.

    Evaluating the rise in central bank gold buying, Natalie Dempster, managing director of Central Banks & Public Policy for WGC, says the move “reflects a combination of factors, including the desire by some countries to dedollarize in response to political motivations and changing global trade patterns.”

    In addition to central banks, commercials, the smart money in the futures market has been buying gold. For the first time in seventeen years, commercials are net long.

    Gold quarterly chart

    Commercials include the miners who traditionally sell production forward. This means miners know what they should produce in the next year and will lock in a price in the futures market. They are short in the market and will then deliver gold at agreed upon prices.

    They are required to report their positions to regulators weekly and the changes in position between commercials and other groups required to report futures markets positions can provide tradable market insights. That appears to be the case right now

    But, now, commercials are long meaning they are buying rather than selling gold in the futures market. This is an unusually bullish position for this group. It indicates that they do not believe there is much down side in the price of the metal.

    This is certainly an unusual time in the market with central banks and commercials buying at high levels. They are the smart money in this market and they are buying.

    This could be a long term opportunity in gold that is a unique chance for investors to enter a market that is about to enter an extended up trend.