The Case For A Long-Term Bull Market In Gold
It's pop quiz time. Which of these three investing benchmarks produced
the biggest returns since the summer of 1999: the S&P 500 average of
large-cap stocks, China's Shanghai Stock Exchange composite index, or
The correct answer? That shiny metal used a lot in jewelry, traded heavily
by short-term speculators in the futures markets, and stored for longterm
safekeeping in bank vaults around the globe.
From a bottom near $250 a troy ounce in August 1999, gold has
delivered compound annual growth of roughly 9.5%. The S&P has
chalked up compound gains of 3.4% a year in that 18-year span,
excluding dividends. Since July 1999, the Shanghai composite has gained
a compounded 3.6%.
If you guessed wrong, it might be because a tough 5-1/2 years took
some shine off gold. The price today is still off more than 30% from
its all-time high of $1,895 an ounce in 2011.
But this year, gold is rising faster than some of the major U.S. equity
indexes. On the Comex exchange, near-term futures are hovering near
$1,288 an ounce, getting closer to breaking through a key trend line that
stretches back to September 2011.
A sharp upward bust of that trend line could signal a change in direction
again and another long-term buying opportunity. For the SPDR Gold
Shares (GLD), that inflection point would be a thrust above 123. The ETF
closed Friday at 122.28, up 11.6% since Jan. 1.
Not that gold is an easy game to play, especially for short-term
speculators. Gold prices continue to show tremendous volatility in the
short term, vacillating with the latest political, economic and
international tides. Since October, the London P.M. fixing price of gold
has risen or fallen 2% or more for the week at least nine times. And over
a 28-week stretch through April 14, it moved up or down 1% for the
week 21 times.
No wonder many golden hairs on commodities traders' heads quickly
"Gold has no true fundamentals, no intrinsic value, only limited industrial
and practical use and doesn't generate cash flow," said Sandra Navidi,
CEO of the macroeconomic consulting firm Beyond Global LLC.
"Its value is primarily driven by fickle psychology and by what the next
investor is willing to pay," said Navidi, the author of "$uperHubs: How
the Financial Elite & Their Networks Rule Our World."
So, if you don't want to trade in the short term, how do you win in gold?
One key, says veteran portfolio manager Joe Wickwire, is to fully
comprehend the difference between being a speculator and an
investor. An investor thinks long-term (at least three to five years) and
understands the beauty of gold as a hedge against the weakening
purchase power of other financial assets.
Wickwire's job as an investment professional is to exploit the disconnect
between the price of gold when it is driven by short-term speculative
money and to know when it makes good sense as a long-term play amid
changing financial, monetary and economic conditions.
"Gold is a financial asset insurance policy," said Wickwire, who
has managed the Fidelity Select Gold Portfolio (FSAGX) mutual fund
since August 2007 as well as the Fidelity Global Commodity Stock Fund
Over the long haul, the four chief factors influencing gold prices are
macroeconomic imbalances, geopolitical shocks, the laws of supply and
demand, and the overall state of the gold mining industry, he says.
Wickwire shares a simple yet brilliant rule of thumb that can help an
individual investor get a sense of the long-term picture for gold: Look at
real interest rates. When rates are less than 2%, the price of gold tends to
Consider the 1970s, when the U.S. economy suffered from double-digit
unemployment and torrid inflation. By 1980, the yield on the 3-month
U.S. Treasury bill climbed toward 14%, but the real rate after inflation was
low. Gold and other precious metals were hot.
When Federal Reserve chief Paul Volcker set on a course to kill inflation
by sharply raising short-term interest rates during the early years of
Ronald Reagan's presidency, the market turned upside down. Inflation
fell, economic growth came back, entrepreneurs started new companies
as tax rates fell, and U.S. equities had their longest stretch of gains (1982
to 2000) of the century.
"Real rates came down and assets were priced properly. Gold was
boring," Wickwire said.
Not so, lately.
Since December, the increasing military tensions in Russia, the Middle
East and North Korea, plus a growing sense that the Fed won't be raising
short-term interest rates as fast as originally thought, have provided a
sort of tail wind for gold. In recent weeks, yields on the 10-year Treasury
yield have fallen sharply from the mid-March peak of 2.62%.
On the Comex, gold futures on Friday traded at $1,286 a troy ounce, up
11.7% since Jan. 1, vs. a 4.9% gain for the S&P 500 and a 4% advance by
the Dow Jones industrial average. Gold has rebounded more than 22%
from the December 2015 low of $1,049.
Gold Price Is Hard To Predict
Investors seeking a long-term view of gold must keep in mind that the
correlation between gold and other major financial assets is not
In the 1990s, gold was a dead weight loss in portfolios as large-cap
stocks reigned. From 1995 to 1999, the S&P 500 more than tripled while
gold dove nearly 40% from a multiyear peak around $415 to the
generational low of $252. Stocks and gold showed an inverse
That changed in the 2000s to early 2010s, when gold staged one of its
most amazing rallies ever. The upturn coincided with a strong rally in
stock prices from the end of 2002 to December 2007. China's voracious
appetite for all metals boosted demand.
Just as important, if not more important, the Federal Reserve helped spur
a devaluation of the dollar, making gold cheaper for overseas investors
to buy. The weaker dollar also made institutional investors move into
From January 2001 to June 2003, then-Fed chair Alan Greenspan and
crew slashed short-term interest rates 13 times, from 6% to 1%. Equities
recovered. Gold began to soar.
"While the long-term correlations between U.S. stocks and Treasuries,
and U.S. stocks and gold, are low or even negative ... the actual realized
correlation between these assets oscillates between strong and weak
over time," investment managers Adam Butler, Michael Philbrick and
Rodrigo Gordillo wrote in the 2016 book "Adaptive Asset Allocation."
The monetary winds are blowing in a new direction today. Since the end
of 2015, the Fed has slowly tightened the money supply. The U.S. dollar
continues to be strong. Further turmoil in the single-currency eurozone
may add more steam to the dollar's rise, which would not be good for
gold in the long term.
Since the second half of 2011, the ICE future market's U.S. dollar index
has recovered more than half of the more than 40% plunge suffered
from 2001 to 2008. This index tracks the dollar's strength against a tradeweighted
geometric average of six currencies, including the euro, yen
Other factors to keep in mind: An improving economy may boost
consumer-led demand for gold, especially in the form of jewelry. And the
rising middle classes in China, India, Russia and Africa may also drive
demand. Yet gold doesn't pay dividends. Equities give the best
economic exposure for investors who have confidence in corporations'
ability to grow the top and bottom lines.
Are Gold Mining Stocks And ETFs Good Alternatives?
Many traders like to bet on gold mining companies and related ETFs.
However, the risks of losing money in gold miners are higher than an ETF
that simply tracks the price of gold bullion, such as the highly liquid
SPDR Gold Shares (GLD) ETF. A gold mine could close due to worker
strikes, bad weather or war. A mining firm may also place restrictive
hedges on its selling prices, limiting its revenue upside if gold prices
"Exploration, production and ancillary costs are high across the board,"
said Navidi, who worked several years as research director for Nouriel
Roubini, the economist and NYU business school professor. "Generally,
there is limited upside when the gold price rises, but great downside
when the price falls. Most mining company investments in the last
decade have disappointed."
The Direxion Daily Junior Gold Miners Bull 3X ETF (JNUG) amplifies the
move of the Market Vectors Junior Gold Miners index by 300%. JNUG,
currently around 5.62, is now 83% off its 52-week high of 33.29. If you
want to make money using such leveraged ETFs, your best option may
be in limiting the use to day trades or short-swing moves.
How Will Macroeconomic Factors Affect Gold?
The U.S. economy isn't exactly going into hypergrowth mode now. China
has been steadily trimming its annual growth forecasts as it seeks to
transform its economic model after decades of export-driven whirlwind
growth. A slow yet steady rise of the economy may lower the chances of
a severe economic freeze and a subsequent rush into gold.
"There are a few signs of softening economic conditions, like an uptick in
car inventories and a downturn in C&I (commercial and industrial)
lending, but most leading indicators that measure economic activity are
showing an economic growth upturn for now," Mark Dodson at Hays
Advisory wrote in an April 6 note.
Money managers will also be watching how quickly the Federal Reserve
unwinds its $4.5 trillion balance sheet. As part of its so-called "QE 3"
program, the Fed bought billions' worth of Treasury bonds and
mortgage-backed securities for several years to help keep the cost of
money at ultralow levels. That era is over. While the money supply is
likely to tighten, the expected outflow from government bonds may lead
to more money flowing into other assets, including gold.
"The gold price is going where real interest rates are going. The market
had expected four to six interest rates, and that wasn't a long-term
negative for gold," Wickwire said, noting that the market has now
adjusted to the likelihood of fewer rate hikes. "This is where long-term
investing comes into play.