The Fed is pulling out all the stops to prevent the unwinding of the excesses that have built up over the past decade, explains James Stack, market historian, money manager and editor of InvesTech Research.
The actions taken by both monetary and fiscal authorities are greater in size, speed, and breadth than any time in U.S. history. In the midst of this monetary experiment of epic proportion, gold provides a safe haven.
This puts the U.S. dollar at risk of devaluation and increases the benefits of holding gold, as the two are typically inversely correlated.
More from James Stack: Jim Stack: Market Historian on Stocks
For example, gold prices increased by more than seven times in the late 1970s and early 2000s — both of which were periods of dollar weakness. Since late 2018, however, the dollar and gold have rallied in tandem.
While this seems like a paradox, there are good reasons why this has happened. First, there is a shortage of U.S. dollars in the global financial system, creating a supply-demand imbalance which has provided support for the dollar in recent years.
On the other hand, gold has begun to approach its all-time highs largely because of the accumulated stress in the global monetary system.
Looking forward, it is more likely that there will be a resolution to the dollar shortage problem than to a fragile monetary system which requires near-zero interest rates to survive. As a result, we anticipate further upside potential for gold stocks in the months ahead.
Meanwhile, there are many reasons to be skeptical about the prospects of a V-shaped recovery. That’s why we want to be cautious about increasing allocation at this time, and to focus on selective opportunities.
One holding in the InvesTech Model Fund Portfolio that we have incremented this year is the VanEck Vectors Gold Miners ETF (GDX). The reason for this increase is simple. Gold has proven to be an effective historical hedge against excessive monetary and fiscal stimulus.
We prefer investing in a gold miner ETF to adding a bullion fund, such as SPDR Gold Shares (GLD), because mining stocks are typically more leveraged to the price of gold.
That’s evident if we look at the performance of both funds following the Financial Crisis in 2009-10. In fact, mining stocks can easily double the rise in gold bullion during a gold market rally.
The Van Eck fund is a good choice for the portfolio, as its holdings range from small to large mining companies with a focus on two of the largest producers in North America: Newmont (NEM) and Barrick Gold (GOLD). Depending on how the current financial situation unfolds, this is a position that we may consider incrementing further as warranted.
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