Gold fell more than 30% over the last four years. And that happened in the context of near-zero interest rates from the Federal Reserve and most developed-market central banks.
Funny. This kind of backdrop should drive capital into gold … not away from it.
I’ve been anticipating a bottom in the price of gold for several weeks. But the hoopla leading up to the December FOMC interest-rate decision kept pressure on precious metals prices.
Interestingly, gold’s low came the day after the December 2016 Federal Open Market Committee announcement … just as it did in December 2015.
I think this owes to the ebb and flow of sentiment, among other things. And the truth is, gold feels very hated now.
Of course, people love gold as a store of physical wealth and a hedge against crisis. But gold can lose relative value, which makes a very palpable impact on investment returns.
Indeed, Barron’s announced the death of gold when it cited Donald Trump, Fed rate hikes and ETF outflows as proof in its article "The End of a Golden Era." The Financial Times did similarly with an article it published recently, "Gold: For Whom the Bell Tolls" (paywall), as have countless other financial media outlets and commentators I’m sure.
Frankly, I don’t care what anyone says. I just care what most people think.
More to the point, I care very much about how they trade based on that thinking.
And not since early February 2016 have large speculators held such a small bullish bet on gold futures, as they do right now.
If you remember, that’s when gold’s 2016 rally truly began to pick up steam. So, since gold has worked its way higher in the last few weeks, gold funds have seen their shares rally in kind.
If gold does continue its rebound, as I believe it will, then gold miners could deliver accelerated gains.
Otherwise, with gold trading at a technical level that seems to offer at least a good short-term buying opportunity, I’ll be telling my subscribers exactly when, and how to play it.
But if you’re eager to place a bet on gold now, here is a reason to help validate your decision … as well as an ETF that offers exposure to gold.
Many say gold is a hedge against inflation … a hedge against deflation … a safe haven … and the first thing you’ll reach for in a crisis situation.
It can be all of those things and none of those things.
Historically, though, gold’s best correlation is with negative real interest rates. Or, perhaps more accurately, the expectations thereof.
This explains why gold performed so poorly during the last four years of near-zero central bank interest rates.
Real rates were negative … but the Federal Reserve’s quantitative easing ended and the investing public was led to believe the Fed was formulating an exit strategy.
Negative real rates became less negative, and money flowed out of gold.
Now gold is rallying, like it did in 2016.
And it could be helped along if investors think a return to negative interest rates is likely. Negative interest rates in parts of Europe and Japan help validate that view.
At the same time, if inflation rises significantly faster than the Fed’s benchmark interest rate, then negative real interest rates could become cemented back into the expectations of investors.
A good way to add long term exposure to gold — without stuffing bullion under your mattress — is with the iShares Gold Trust (IAU). It is an ETF with a low expense ratio (0.25%) and it tracks the price of gold quite closely.
Now, to be clear, I am not calling a long-term bottom in gold. It’s too early to do that with any real conviction.
Thus, I’m not sure miners have escaped the pressures of a low gold price either.
But I do see opportunities in ETFs such as IAU or even in the VanEck Vectors Gold Miners ETF (GDX) if the associated expectations materialize.