Should You Buy Gold -- and If So, How Much?
The gold bugs are getting excited once more as gold trades back over the $2,000 mark. Since the pandemic, gold has spiked over $2,000 twice only to see 15-20% pullbacks. But the bulls think this time is different and they are pounding the table that now is finally gold’s time to shine.
I have technical targets above current levels and see gold trading as high as $2,500 over the next twelve months. If this scenario plays out, the question for many investors should not be why to buy gold, but how to get exposure to this potential upside.
In this write-up I will discuss the multi-year bull case for gold. We will then go over the pros and cons of why gold should be part of your overall portfolio.
We will also discuss how much gold should be in a portfolio and give different ways on how to get exposure. I will then give you my two favorite gold stocks to own going into year’s end.
Before we get to it, I will leave you with a quote from J.P. Morgan:
“Gold is money. Everything else is credit.”
Why Gold Will Go Higher
1) Bank Stress
The recent breakout in gold was triggered by the banking stress surrounding the failure of Silicon Valley Bank and Signature Bank. These were the second and third largest U.S. bank failures of all-time and their demise rattled markets.
While the fear of contagion has faded away and the mini-crisis is over, investors were reminded of the appeal of gold as a safe haven.
Since the March 10th failure of SVB, gold traded up over 12%. Investors should expect these fears to remain fresh in the minds of investors in the near term.
Image Source: Tradingview via Zacks
2) Interest Rates To Fall
Gold hit its 2022 lows as interest rates were hitting their highs in October. The 10-year treasury note was at 4.33%, which made gold very unattractive and allowed its price to fall into the low $1600 area.
Since then, the 10-year note has fallen to 3.5%. The drop in rates and the combination of the bank stress brought gold buyers in, helping drive gold up about 25% from those 2022 lows.
And the gold bulls are very excited as rates look to fall substantially in the back half of the year.
The market is expecting interest rates to drop into the end of the year. While most expect one more rate hike in May, the market is expecting almost a full percent drop in rates by January 2024.
If this scenario plays out, the case for gold becomes a bit stronger as interest rates in treasuries and other instruments become less attractive.
Continued . . .
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3) The Fear Trade
Geopolitical events have dominated the news over the last couple years. The war in Ukraine has changed the way investors look at the modern world and how they approach gold. Over a year ago, Russia’s invasion shocked markets and gold prices shot up 10% in a week, almost taking out all-time highs.
While gold did rise, the war remains. With heightened tensions between the U.S. with Russia and now China, fear is building, which is bullish for gold.
4) Technical Analysis
Gold has pulled back from the April highs of $2,063, almost falling back below $2000. Investors should watch the moving averages as they are potential spots to buy the dip.
The first spot is the 21-day MA at $1997. This is a momentum indicator that hasn’t been tested since the March breakout.
The second spot to the 50-day at $1920 and the big level of support will be the 200-day MA at $1800.
Looking at the big picture, gold has been trading in a bullish trend since early 2019. Drawing a Fibonacci retracement from 2018 lows to 2020 highs gives us halfway back support at $1600. This retracement held my targets for this setup are $2300. If the bulls continue to push above that area, $2500 would be the next level to target.
Reasons For Owning Gold
-- Inflation Hedge: One of the reasons gold had such a great run during the pandemic was the market saw inflation coming. But as interest rates went higher, money moves out of gold. Investors saw higher yields and anticipated inflation would inevitably go lower. The end of rate hikes is now in the near future, so gold is finding interest as rates go lower and the possibility of inflation returning increases.
-- Limited supply: Fiat currencies have been diluted by central banks printing money hand over fist. There is a finite amount of gold on the planet and unless there is a massive outer space gold discovery, the limited supply will help golds value increase over time.
-- Safe haven: When fear increases during time of economic or geopolitical trouble, the price of gold does as well. During the first few months of the pandemic gold spiked over 25%. During the Russian invasion of Ukraine, gold moved almost 15% higher. The yellow metal is a place to hide and sees increased demand during times of uncertainty.
-- Diversification: While gold can be a risk-on asset as rates go lower, it can also be a great way to diversify the overall portfolio.
Downsides of Gold
-- Non-yielding instrument: Gold offers zero yield on your investment, so you only make a profit if someone is willing to pay a higher price than you did. For this reason, gold moves inversely to interest rates. As rates go higher, the desire to own gold goes down as higher yielding instruments are more attractive. One way to get around this is to own a gold mining stock that pays a dividend.
-- Low industrial use: Unlike other metals, gold has very little industrial applications. This limits buyers for gold, unlike its cousin silver, which has many industrial uses.
-- High Storage costs: If investors want to own physical gold, they typically desire a secure location. This involves high storage and insurance costs that can eat away at long-term profits. One way to get around this is to own a gold ETF like GLD.
How Much Gold Should You Own?
The general practice for most investors is to have 5-10% exposure of gold in the portfolio. However, because of the potential for commodities and gold going forward, investors might want to increase their normal exposure to the upper range of a typical allocation.
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Jeremy
Jeremy Mullin is a technical expert with 18 years of specialized experience pinpointing the best times to buy and sell commodities. He invites you to take advantage of 30-day access to ALL Zacks private buys and sells for $1.
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