The annual “In Gold We Trust” report by Liechtenstein-based investment firm Incrementum is a must-read account of the gold market, and its just-released chartbook for the 2018 edition is no exception.
The strengthening U.S. dollar has lately dented the price of gold, and rising interest rates have made some yield-bearing financial assets attractive. But as Incrementum shows, there are many risks right now that could favor owning gold in a portfolio.
Below we’ve selected five of the most compelling charts that highlight why we believe gold is appealing in this climate.
1. The End of “Easy Money”
To offset the effects of the global financial crisis a decade ago, central banks increased liquidity by slashing interest rates and buying trillions of dollars’ worth of government securities. Now, however, it looks as though banks are ready to start tightening, and no one is really quite sure what the consequences will be. The Federal Reserve was the first, in late 2015, to begin hiking rates, and it’s been steadily shrinking its balance sheet for about a year now. Other banks are set to follow suit. According to Incrementum, the tide will turn sometime next year, with global liquidity finally set to turn negative. In the past, recessions and bear markets were preceded by central bank tightening cycles, so it might be a good idea to consider adding gold and gold stocks, which have historically done well in times of economic and financial turmoil.
2. Some Central Banks on a Gold-Buying Spree
While we’re on this subject, many central banks have been net purchasers of gold since 2010, with China, Russia, Turkey and India responsible for much of the activity. Just this month, Poland added as much as nine metric tons to its reserves this past summer. If gold is such a “barbarous relic,” why are they doing this? As Incrementum writes, “The increase in gold reserves should be seen as strong evidence of growing distrust in the dominance of the U.S. dollar and the global monetary system associated with it.” We believe having a 5 to 10 percent weighting in gold and gold stocks could potentially help you diversify away from fiat currencies and monetary policy.
3. Too Much Debt
Everywhere you look, debt has risen to historic highs, whether it’s emerging market debt, student loan debt or U.S. government debt. Meanwhile, higher rates are making it more expensive to service all this debt. As you can see below, interest payments will hit a record $500 billion this year. It’s forecast that the federal deficit will not only reach but exceed $1 trillion in 2019. How will this end? Earlier this year, we called this risk the “global ticking debt bomb,” and we still believe it’s one of the most compelling reasons to maintain some exposure to gold.
4. A Potential Store of Value?
In U.S. dollar-denominated terms, the price of gold is down right now. But in Turkey, Venezuela, Argentina and other countries whose currencies have weakened substantially in recent months, the precious metal has increased significantly. In our opinion, this alone should be reason enough to consider having some wealth stored in gold. Need further proof? According to a recent Bloomberg article, the cost of a black-market passport in Venezuela right now is around $2,000. That’s more than 125,000 bolivars, or 68 times the monthly minimum wage. A Venezuelan family that had the prudence to own might be in a much better position today to survive or escape President Nicolas Maduro’s corrupt regime as evidenced by the increased
5. A “Sterling” Time to Buy Gold?
Finally, a word about timing. According to Incrementum, some of the best gold buying opportunities have been when the gold/silver ratio crossed above 80—that is, when it took 80 or more ounces of silver to buy one ounce of gold. If you look at the chart below, you’ll see that such instances occurred in 2003, 2009 and late 2015/early 2016—all ideal times to accumulate. We see a similar buying opportunity today, with the gold/silver ratio at a high of 83 as of October 8. What’s more, gold stocks are the cheapest they’ve been in more than 20 years relative to the S&P 500 Index.
Curious to learn more? Explore the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) overview where you can see its top holdings, performance and more!
Past performance does not guarantee future results.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
Diversification does not protect an investor from market risks and does not assure a profit.
U.S. Global Investors is not affiliated with Incrementum.
It is not possible to invest directly in an index.