Last week, MarketWatch ran an article written by InvestorPlace editor Jeff Reeves and titled, “Seven Reasons to Sell Gold Now.”
It offered the usual cookie-cutter reasons that gold supposedly is not a good investment right now: lack of inflation, tighter monetary policy in the US, and a “risk-on” market environment, just to mention a few.
All in all, I think the article missed the mark, so here’s a rebuttal for each argument.
1. Charts look positive
Reeves claims in his article that the gold charts “look ugly.” His reasoning is that “the charts show a breakdown as gold has been stuck in a near-constant decline for the past two weeks after peaking at $1,350 or so in early September.”
I beg to differ. While charts can be interpreted in various ways, based on the time frames selected and the message that’s being relayed, gold charts do not look ugly.
Technical analysts typically use chart time frames ranging from six months to three years, and most have turned decidedly more bullish. You can clearly see this in the one-year chart.
Notice the series of higher highs gold has made since the January level of $1,130. Each move higher has been met with a subsequent decline, but each decline has been smaller than the up-move.
These “two steps forward, one step back” increases are a bullish signal and show a healthy market advance.
Additionally, despite the recent pullback, gold is trading above its 50-day and 200-day moving averages, both of which are critical support levels and indicators of a positive trend.
2. Inflation does matter—but in the context of interest rates
Reeves states in his article, “It’s clear that gold prices are not getting a tailwind from inflationary pressures.”
Pigeon-holing gold as an inflation hedge is a common mistake investors and analysts make. Yes, gold has done and can do very well during times of higher inflation, but the actual driver is real interest rates.
As you can see in the chart below, gold has steadily marched higher while the real rate on the 10-year Treasury has moved largely sideways in the past year.
3. The Fed has been tightening policy for almost two years
“It’s hard to imagine gold finding a footing,” Reeves writes, “as the dollar stays strong and tight monetary policy keeps inflation well in hand.”
But that’s not what we’re seeing.
During this cycle of monetary tightening, the fed funds rate—the rate controlled by the Fed to influence borrowing costs—has been raised four times.
- December 2015: raised by 25 basis points
- December 2016: raised by 25 basis points
- March 2017: raised by 25 basis points
- June 2017: raised by 25 basis points
Since this time, gold has rallied almost 25% from $1,050/oz. to $1,300.
Longer-term rates, often used to gauge investors’ expectations for inflation and economic growth, remain mostly unchanged from two years ago.
All the while, stock markets have continued to make record highs, but are still underperforming gold since December 2015.
Furthermore, Reeves states that gold will struggle as the US dollar remains strong amid tighter monetary policy.
The US dollar has declined more than 10% against major currencies this year—despite two rate hikes and the Fed’s announcement that it plans to reduce its massive balance sheet.
I think this provides a solid case for higher gold prices.
4. Price targets?
Reeves points out that while Goldman Sachs is bullish on gold, “its three-month target of $1,260 and its 12-month target of $1,250 are below where gold currently trades.”
Price targets are just that: targets.
For almost any investment, they are generally worth about as much as the virtual paper they’re written on.
At least stocks have fundamentals like revenue, earnings, and multiples you can build a price target around. Commodities, on the other hand, are known for wild and unpredictable moves, rendering price targets mostly useless.
You can find, or pay for, forecasts to substantiate almost any investment thesis, so this is probably the weakest argument to not purchase gold right now. In fact, taking a contrarian view to major Wall Street firms is often a recipe for success.
I suggest you do a quick search of gold price forecasts from the past few years. You’ll find projections from well-known and respected analysts ranging from $10,000 to $700 per ounce.
Picking a mid-point or throwing a dart may have more predictive value.
5. There’s always a bull market somewhere
Reeves suggests we’re in a “risk-on market,” saying that even though gold has outperformed this year, “how long will that last?”
This is flawed thinking, in my opinion.
Given the plethora of financial markets and investment options, you can always find an industry, economy, or company where investors are taking on added risk.
This is simply a function of capitalism and asset allocation.
“Risk-on/risk-off markets” has become a buzzword in the financial media, but risk is a very nuanced factor, not a binary option.
Yes, gold can benefit from heightened volatility and fear, but at the end of the day, it’s a source of portfolio diversification and insurance.
6. Mounting geopolitical tensions
Reeves thinks that despite increasing global turmoil, “the world keeps turning and the indifferent West isn’t all that concerned.”
That almost sounds like a joke.
The mounting tensions with North Korea have been a key driver of gold’s strong performance this year.
Sure, not every piece of breaking news and not every missile test is met with a spike in gold prices, but the erratic nature of this conflict and the involved parties will continue to cause investors to flock to safe-haven assets.
And it looks more and more likely that the mudslinging from both sides will eventually result in some kind of military action.
Again, these are not simple binary events where it’s either risk-off or risk-on. There are many possible outcomes, with a variety of risks to investors.
7. The Bitcoin effect
Reeves believes that since gold and Bitcoin recently have moved together, their movements are forever correlated.
However, that might not be the case.
The real value of Bitcoin and other cryptocurrencies may be in the blockchain technology they’re built upon.
Major banks are investing huge sums in the blockchain, so its role in the financial markets will likely be transformative.
However, as we wrote earlier this week, Bitcoin is likely in a major bubble.
The rise of this digital currency has been parabolic, going from $600 to $5,000 in less than a year.
Who knows where the price will eventually settle. What I don’t understand is how investors can perceive it to be an actual alternative to the US dollar or gold.
And how could mere numbers on a screen be a true store of value, especially with all the arbitrary regulation that is now building around it?
If anything, the rush into Bitcoin and the loss of confidence the bursting of this latest bubble will cause may remind investors of the time-tested virtues of gold—and the reasons investors have sought its safety for thousands of years.
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