…[While] this year has been especially lackluster for gold [with] its price slumping 8% YTD…and…off more than 35% from its high…in 2011…this out-of-favor asset class now deserves a place in investment portfolios. Here’s why.
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1. Gold Is Historically Cheap Versus Stocks
…The Dow/gold ratio has ranged from a century-old high of 40 in 1999 to a low of 1:1 in 1980 at the top of the commodity boom. The most recent low in that relationship occurred in 2011, when the Dow/gold ratio dropped to 7.8. Then, gold was near its all-time high of $1,900 an ounce. Today, it effectively takes 22 ounces of gold to buy one unit of the Dow [so,] overall, [gold is] historically cheap versus stocks…
2. Gold and Financial/Economic Crises
Gold has been a traditional hedge against financial and economic crises, playing that role during the 2008-09 meltdown. Gold rallied 17% from the collapse of Lehman Brothers on Sept. 15, 2008, until the stock market bottomed on March 9, 2009—a period during which the S&P 500 fell more than 40%.[That being said,] “In a severe bear market, it likely will provide some protection, but in a correction in a bull market, it may or not” says Byron Wien, a vice chairman in the Private Wealth Solutions Group and an investment strategist at the Blackstone Group.
Cryptocurrencies have lately been touted as taking over gold’s role in a crisis but a 55% drop in Bitcoin this year…and slumps in other cryptocurrencies, have taken the shine off that market and there is still no easy way to get exposure to Bitcoin. In comparison, gold has had allure as a store of value and measure of wealth for thousands of years and gold remains so in much of the world, including China and India…
3. Gold and Inflation
Gold has represented a good defense against inflation eroding the value of a stock or bond portfolio. Over time, it has held its value against the dollar. Gold was $20.67 an ounce 100 years ago and that bought a good men’s suit. At $1,200 an ounce, the same is true today.
Virtually every government in the world is trying to promote inflation partly because there is so much sovereign debt and when there is so much debt…governments have three choices: default, restructure, or inflate the currency. Politicians, when given the chance, will choose the latter.
4. Gold and the U.S. Dollar
Gold is the anti-dollar…Historically, gold and the dollar have a negative correlation of 80% to 85% so one catalyst that could change investor sentiment on gold is a decline in the U.S. dollar.
The dollar has been supported by expectations that the Federal Reserve will keep tightening and lift its benchmark federal-funds rate to 2.5%-3%, from the current range of 1.75% to 2%, by the end of 2019. The Fed may have to relent, however, in part because the upward pressure on rates is squeezing developing economies that have dollar-denominated bonds or other obligations and, if the markets sense that the Fed is about to hold off, the dollar could drop and gold would probably rally…
5. Gold Supply
Gold is rare, and it’s hard to rapidly increase the supply of it…There are an estimated six billion ounces of gold in the world, worth more than $7 trillion, about 30% of the value of the S&P 500. Annual new mined supply adds less than 2% to the global total.
U.S. stocks are at record levels exactly at a time when global stress—trade tensions, populist nationalism, and the like—appears to be growing. This may be an opportune moment for investors to shift at least a portion of their portfolios to gold: both the metal and depressed mining shares.
For those who are interested in gold, there are plenty of ways to play it: