17 February 2014
Over the past few weeks the world has been focused on Gold as world class athletes compete at the Winter Olympics in Sochi. These athletes have dedicated their lives towards the dream of standing on the awards podium and having an Olympic medal placed around their neck. Gold is certainly used to capturing headlines over the last several years as as its returns caught major attention.
Mr. Market rarely considers gold to be a worthwhile investment or warrant a place in anyones portfolio. We’ve written a few articles about the precious metal over the last few years but honestly haven’t given it much press. Why is so little of our attention given to gold as an investment? Let’s be blunt about it… There is plenty of market chatter already given to Gold and most of it is nothing but noise. We prefer to touch on it at key inflection points and this happens to be one of them.
The first article we wrote was our most popular. This piece was written when the stock market was getting hit every week and gold was doing just the opposite; it was setting record highs and receiving all the glory. Writing a piece about why why we didn’t want to buy gold was not popular at the time but now it sure seems like our crystal ball was as spot on as it could ever have been. Here is the article, we would encourage you to read it again if you haven’t already (Click here)
The second article was more of a follow-up piece. Read the full version here (Click here) or for a quick recap this is what was happening in August of 2011:
“Investors sometimes have short memories but nothing specific really happened on this day; it’s what was happening that summer that we want to bring back into focus. Since we recently wrote an article about “Sell in May and Go Away” let’s actually go back to that very point in time. After a positive month of stock market returns in April of 2011, the S&P 500 dropped -1.35% in May, -1.83% in June, and another -2.15% in July.
There were rampant fears across all global stock markets. Worry kept mounting weekly due to the threat of contagion of the European sovereign debt crisis spreading into Italy and Spain. Leading up to the August 6, 2011 downgrade of the United States credit rating from AAA to AA+, we also were preparing for France’s credit rating to be lowered. On August 8, 2011 alone…the S&P 500 dropped -6.7% in one day! September of 2011 also proved to add more fear and negative returns by losing another -7.18%. So…was anything going well? You bet…
Gold climbed to $1,750 an ounce in August of 2011. The shiny yellow metal, historically considered a hedge against the markets and inflation, was not only perceivably providing security but also nearing all-time highs with the greatest of ease. There was non-stop talk about the strength and value of gold. Every media outlet was barking about it and with the equity markets being punished it was clear to most investors that this was the place to be. Or was it?”
Now that investors are no longer rifling through their grandmother’s old jewlery boxes or considering pulling a gold tooth to trade it in at the local “Cash for Gold” store…we can calmly revisit the possibility of investing in gold.
From a technical standpoint we think it’s important to show you that Gold has finally broke through its 200-day moving average and that hasn’t happened since August of 2012.
Passing this level also marked Gold trading above the psychologically important price of $1,300 an ounce. This price level could also force a decent amount of technical buying. For those of you who could care less about a chart or trying to find a “dead cat bounce”, at least consider what could be a very real driving force for Gold in the near future; a weaker US dollar.
Let’s preface this argument for higher gold prices by saying that there are plenty of people who are stock piling in gold or hoarding cash in fear that the sky is about to fall. There is no shortage of doom and gloom forecasters who are quite good at convincing the public that our global economic system is heading towards a crisis of apocalytpic levels. We’re not in that camp yet, and although we have not fully trusted the amazing run that the stock market has enjoyed, we believe there is a growing argument to consider adding gold as a hedge due to future pressure on the dollar.
Some very big players are moving money back into gold after it has been crushed the past couple of years (-28% in 2013). Some other famous investors like Warren Buffet will continue to avoid owning it. His basic premise on not owning gold it that it’s a “nonproductive asset and doesn’t produce anything of value”. One of our favorite quotes of his is :
"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head" -Warren Buffett
Others, however, are extremely bullish on gold. JP Morgan sees investing in gold as one of the top investment plays for 2014. They have been one of the biggest buyers of physical gold and also are touting several stocks positioned to do well if prices continue to climb and recover.
We believe now is a good time to consider establishing some exposure to gold and it’s more than just a contrarian or inflationary play. Gold has historically been used as an inflation hedge and although we’re all bracing for inflation to knock us over it has yet to truly rear its ugly head. Ironically enough, gold is actually given a false pass that it’s an inflation hedge. This is primarlily due to one decade (1970’s) when there was a positive correlation between gold and inflation.
The economy still needs to catch up to the stock market and we believe 2014 will provide several spots where this will happen. Gold should do well during any market turbulence but our number one reason to consider some exposure is back to the reality of more downward pressure on the dollar. Along with continued “kid glove” treatment of any further tapering announcements you can expect gold to increase in price with an economy that is showing some jitters and a dollar that just hit a six week low versus a basket of other currencies.
As we have documented on August 23, 2011 we were bearish on gold and GLD (gold Exchange Traded Fund) peaked that day at $183.81 per share. GLD now trades around $127 per share and we have a $150 price target on it which would equate to gold trading around $1,570 per ounce. Gold may never be a huge portion of any of our portfolio allocations but it certainly merits a position now. If you have questions on how much gold you should consider holding in your portfolio, let us know and we would be glad to run a real-time analysis with precise recommendations.