Precious metals are heating up, much to the joy of the investors that have stuck with the shiny laggards. Gold has been enjoying a good rally, and that should help pull up silver, which has been in a slump. “It is difficult to be pessimistic about silver at these levels”, says one portfolio manager. Silver is down more than 9% this year, even as gold has rallied. However, eventually gold will start pulling investors into silver. “Silver has lacked retail investment demand, so a sustained rally in gold will lead to the speculators coming and buying silver”, says the portfolio manager.
FINSUM: Precious metals have not been getting much attention for years, but gold is off on the right foot this year. Importantly for silver, a recession doesn’t hurt demand because it isn’t an industrial commodity.
Gold is an interesting asset class right now. Everyone knows it has been in the doldrums for many years, but with recession fears brewing, and rates falling, the outlook is an interesting one. Goldman Sachs thinks gold is headed higher. Their thesis is that late cycle worries and falling rates will combine to push up the shiny metal. Falling rates will weaken the Dollar, further helping overseas buyers purchase gold.
FINSUM: In general, we like this thesis. However, we think gold would do better if there was more worry about a huge downturn/crisis, which there doesn’t seem to be. Fears right now are about a standard recession, which would help gold, but maybe not be ultra bullish.
Tell us an investment that does well when inflation is rising AND when rates are falling? Most investments are sensitive to one or the other, but gold can benefit from both. Rising inflation (and rates) can lead to gold-buying as a hedge, helping prices, while falling rates make the metal’s zero yield look more attractive (and make it easier for overseas buyers). Yet, conditions in the middle of those two extremes—which have prevailed since the Crisis—are usually bearish for the metal, as it does not have a natural place in the portfolio in such conditions. That said, gold’s outlook is now the best it has been in years, as the economy is weakening and rates look likely to fall, weakening the Dollar and clearing the path for appreciation.
FINSUM: Gold is in the most interesting position we have seen for some time and we are inclined to think it might start to rise out the doldrums.
Al the stars are aligning for gold. The metal has been in an epic slump for years. The great post-Crisis recovery has not been so for gold, with the asset falling in value considerably from its Euro crisis-era peak. However, yields are coming down and the threat of recession is rising, both factors which make gold likely to do well. Not only would both factors help gold because of its relationship to interest rates (i.e. the lower the better), but a weaker Dollar also helps overseas buyers of the metal.
FINSUM: The other interesting non-macro factor that may help gold is the recent huge merger of Barrick Gold and Randgold, which consolidates the market and offers a more compelling mining stock to own. It may also put a lid on supply, which could boost prices.
2019 is shaping up to be a rough year for markets. Growth is weakening, inflation may rise, and the tax cuts’ contributions to earnings and GDP are going to fade. With that in mind, the Wall Street Journal is arguing that gold is likely to be the “best house in a bad neighborhood” next year. One research analyst summarizes gold’s outlook like this, saying “Being long gold has been a tough investment since 2012, and so often, when we see the yellow metal gaining traction, the [U.S. dollar] regains its mojo, and we see the inevitable reversal … However, as we look into our crystal ball and gaze into 2019, emerging warning signs can be seen that suggest 2019 could be the year where gold bulls finally get their day in the sun”.
FINSUM: If asset classes all become correlated and are trending downward, there is a view to gold doing well. However, we are worried about inflation and rates rising, both of which would strengthen the Dollar, and in turn hurt gold.