The case for gold just got stronger as the Fed mulls rate cuts … Meanwhile,Barron’s pushes a Neil George pick to new heights
Last Friday, bad news became good news.
The end of the week brought word that the economy added only 75,000 jobs in May. That’s one of the weakest monthly gains since the recession ended.
But rather than be pessimistic about the report, Wall Street cheered. You may remember the Dow added 263 points last Friday on the news.
You see, Wall Street is interpreting the lackluster jobs report as further evidence supporting the need for a rate-cut (or two) in 2019. As of a couple weeks ago, most bets were on a possible cut coming in either the third or fourth quarter, but now some are looking to next week at the Fed’s June 18-19 meeting.
In last Wednesday’s Digest, we discussed a concern with rate-cuts, namely that the Fed has little room to lower them before we hit zero. That said, if rate-cuts are coming, it likely means stocks are in for more gains … for a while, at least.
But rate cuts might also benefit another asset class we haven’t talked about in a while …
***Gold has quietly been consolidating and gaining strength
We began writing about gold’s move back in January. At that time, the precious metal had quietly climbed nearly 10% from the summer, with much of that coming in the fall as scared stock investors rotated into gold in hopes of protecting their wealth.
This is because, historically, gold has been a “safe haven” asset. In other words, when riskier markets (like stocks or fiat currencies) crash, people flock to gold to protect their wealth.
In this way, gold’s main role in a portfolio is as a chaos hedge or wealth preserver. But that doesn’t mean gold can’t make bigger moves in shorter periods. And one of the biggest factors that can drive gold prices higher in the short-term are lower interest rates.
You see, rising interest rates push down gold’s price. That’s because higher rates mean investments that pay interest become more attractive (relative to gold that doesn’t spin off any cash flow). In this way, there’s an opportunity cost to investing in gold when rates are rising.
But lower rates decrease this opportunity cost. And if the Fed cuts rates this year (possibly twice), it could mean another leg higher for gold.
***As of Friday, gold had rallied back from spring lows, briefly besting its recent February high
We recommended a gold trade on January 9th. At that time, gold’s spot price was $1,289. Gold pushed higher, adding a fast 4% to hit $1,343 by February 20.
But as the stock market surged higher into spring, an increasing number of investors rotated out of gold and back into stocks. This pushed down gold’s price as you can see in the chart below.
That said, I suspect your eye will be drawn to what’s happened as May rolled into June on the right side of the chart …
As of last Friday, gold had rallied 3.5% since May 22nd, that’s a significant move for gold in less than three weeks. The precious metal hit an intra-day high of $1,348, its highest level since April 2018. Even better, last week was gold’s biggest weekly gain since April 2016.
Earlier this week, gold pulled back as traders have taken profits and stocks have rallied on encouraging news on the Mexico/tariff front. But as I write Wednesday morning, it’s up 0.5%. Even with this week’s consolidation, gold looks attractively positioned.
***As further evidence, let’s look at gold on a longer-timeline now
After bobbing up and down in a sideways “base” pattern for more than five years, gold is starting to do something interesting. As you can see from the chart below, gold is now trading in a tighter pattern than it has in recent past. This is shown by the blue trend lines starting to “compress” together on the right side of the chart.
Also, note the action in the bottom “pane” of the chart. That pane features the readings of an indicator called Average True Range (ATR). ATR is a volatility indicator. It shows how much an asset or security is moving up and down in a given time frame. Higher ATR readings are higher volatility readings, and vice versa.
As you can see in the chart, gold’s ATR is trending lower and lower and lower. Gold’s volatility has “compressed.” A study of market history shows that assets often make strong moves after going through periods of compressed price action and compressed volatility. Since the long-term trend of gold is up, the odds favor a breakout to the upside.
***Gold’s move higher has even landed on Neil George’s radar
You may not expect this since Neil is an expert income investor and gold doesn’t pay any dividends. But Neil has noticed gold’s strength and some gold-related investments do offer attractive cash flows.
From Neil’s recent Profitable Investing update:
Year to date, gold has improved in price — including all of its fits and starts — by 3.42%. It really shined during the fourth quarter last year with a price gain of 7.94% as the general stock market dropped.
Gold prices in the U.S. tend to fare better when the U.S. dollar is lower and U.S. interest rates are lower and set to fall further. The weaker dollar helps the dollar price of the metal, and lower interest rates mean that it costs less in both the opportunity cost to own gold and the cost to carry gold.
The dollar is stronger right now, which is hindering gold. Yet, interest rates are lower and, with the Federal Reserve potentially set to reduce the federal funds target range, there is more of a case for higher gold prices.
While Neil hasn’t made any recommendations yet, he’s considering a few options. But the bigger picture here is that when gold has even an income investor taking notice, it’s worth paying attention to.
***Speaking of income investments, one of Neil’s under-the-radar recommendations was just praised by Barron’s, leading to a nice pop for subscribers
Neil prefers to stay quiet about most of his recommendations that pay big dividends. After all, when a great, cash-gushing investment is off the radar of other investors, it remains well-priced.
But when the press picks up on it, there’s usually a price pop. And sure, that might give subscribers a nice gain, but it comes at the expense of being able to continue reinvesting at low prices for a great yield.
Barron’s just ruined the party.
Neil introduced Compass Diversified Holdings to subscribers last summer. Since then the stock has turned in a combination of dividends and price movement to deliver a total return to date of 23.25%.
But two weeks ago, Barron’s did a full write-up on Compass, and as of Neil’s recent update, the stock had climbed more than 12% since the story came out.
Frankly, it’s little wonder. As you can see in the chart below, Compass has rewarded investors with a return of 372.54% over the past 10 years, for an average annual equivalent return of 16.94%. That’s significantly better than the performance of the S&P 500 Index.
***Since the secret is out, we might as well let everyone know how great this company is
If you’re not familiar with Compass, it’s a pass-through company set up to resemble a business development company (BDC), but it’s really a holding company. Rather than focusing on lending to and financing companies, it buys controlling interests in or whole companies in the smaller to middle market sector of the U.S. market.
It has oodles of cash, and debts are reasonable at 46.50% of its assets. In other words, it isn’t too leveraged.
Year to date, the stock has returned 47.90%, including its dividend yield of 8.20%. It really is the gold standard for great income and growth, which is what I strive for in Profitable Investing …
At only 1.40 times its book value and a discount of 40.00% to its trailing revenues, it is still a good value. This stock should really be valued at one or more times its revenue, which would put it closer to $24.57, or higher. And that assumes revenues are flat and not set to rise further.
At the time of this writing, Compass is trading at $18.67, which is slightly above Neil’s buy-up-to price of $18.35. if you’re looking to initiate a new position, be watching for a pullback.
Congrats — or shall we say “sorry” — to Profitable Investing subscribers. But given Neil’s track record, we suspect a new cash-gushing, under-the-radar income investment will be headed your way soon enough.
Have a good evening,