One of the great mysteries of 2022 has been the massive drop in gold prices.
Since reaching its annual high in March — above $2,050 — the shiny metal has plunged under $1,700. Naturally, fans are scratching their heads.
Isn’t gold supposed to be a hedge against inflation?
And isn’t inflation raging all around the world?
The answer is “yes” to both questions. But there is a lot to unpack around price activity since the war in Ukraine fueled an explosive move in March before a deep pullback.
Gold is getting a bid on Friday, with prices adding nearly 3%. The falling dollar has contributed to the short-term pop, but something else is brewing under the surface that is reigniting the gold trade…
And I want to make sure you’re aware of this disturbing trend.
Why Is Gold Struggling?
As the Federal Reserve raises interest rates, non-interest-bearing assets have taken a hit. Gold, after all, is just a shiny metal. It doesn’t pay dividends, like most oil stocks, for example.
The fact that it doesn’t offer a yield can deter a lot of investors — especially in an environment where real interest rates are negative.
That said, gold has held up well against stocks and emerging-market currencies during previous rate hike cycles.
Yes, gold has historically been a good hedge against inflation. But it’s also struggled as an asset in times of financial crisis. Back in 2008-09, when the markets cratered, gold actually declined in value. In the chart below, you can see gold prices bottoming out in the middle of the 2008 liquidity crisis.
Gold rose again in 2009 and 2010 as significant amounts of capital entered the markets. The Fed’s quantitative easing was good news for all risk assets — gold included.
Then gold prices hit a new high in 2011 due to the debt ceiling crisis that nearly fueled a U.S. government default. Once that problem was resolved, gold took a big hit.
It played “ninth-fiddle” to tech stocks, cryptocurrency and plenty of other assets that benefited from trillions in cheap money and low interest rates.
Despite news that we created 40% of all U.S. dollars in existence between 2020 and 2021, gold is still struggling. The ongoing rate hikes play a role.
But let me show you why having some gold might be a good idea in this environment.
Who is Buying What?
A headline caught my attention yesterday… It was so stunning that I had to take a seat.
In the third quarter, central banks worldwide bought more gold than they have in 55 years.
The World Gold Council (WGC) announced that central banks purchased nearly 400 tonnes of gold last quarter. That rounded out to a stunning $20 billion in the shiny metal.
Various reports indicate that Russia, China, India and Saudi Arabia are the nations buying.
But why so much… and why now?
Some believe it’s an effort by these nations to create their own gold-based system to back their global commodity trading. It’s unclear if that’s the case.
With a war raging, emerging markets cratering and concerns building around energy prices, there is a good argument to own some gold.
Just don’t read the news, drink wine and visit any gold websites at the same time. You’ll end up buying all the gold — and drinking ALL the wine.
What’s a reasonable amount of gold to own yourself?
The Right Way to Own Gold
My preferred capital allocation for precious metals is 5%. Each quarter, I will rotate my assets to ensure that roughly 5% of my investments are linked to gold and silver.
So if my portfolio increases, and gold is over 5% weight, I sell some of it. If my portfolio changes and I don’t have enough gold, I pick up a little more.
What’s the best way to own it?
The obvious answer is found in physical gold. I own American Eagle Gold coins and store some of them in a safe, and others in a safety deposit box. That’s one way…
But you can also focus on proven gold-producing companies. I trust the companies in Canada due to their stronger regulatory oversight and reduced exposure to emerging markets, labor strikes and unforeseen challenges.
You can also look at miners like Barrick Gold Corp. (BYSE: GOLD) and Newmont Corp. (NYSE: NEM). You might even look at companies that produce other key industrial metals like silver and platinum, or even lithium and uranium, to take advantage of the growing alternative energy mandates around the globe.
Finally, there are two things to remember…
First, you don’t need to hire someone to store gold for you.
And you definitely don’t want someone who is storing it on another continent.
Second, some people hold SPDR Gold Trust (NYSEArca: GLD) since it’s as easy to buy and own as a stock. But I caution against this ETF based on the leverage involved, and unnecessary payments required to the manager — the expense ratio is 0.4%.
Yes, there will be some volatility in the metal over time, but this is a critical tool of diversification. You’ll be glad you own a small sliver of gold in this ever-evolving geopolitical environment.
What I’m Watching…
- Twilio Collapses: Shares of Twilio Inc. (NYSE: TWLO) plunged 33.5% on Friday after the company issued a dismal revenue outlook during its earnings report. This was an especially big hit to ARK Invest Founder Cathie Wood. Twilio is a major holding of the ARK Innovation Fund (NYSE: ARKK). I found that executives at the company have ignored their stock over the past year. They’ve bought $1.1 million shares while selling $35 million in stock. So if executives aren’t buying TWLO stock, why is Cathie holding it?
- Is This the End of HGTV? People who buy and flip houses are in a lot of trouble. Mortgage rates have now doubled in the past year, making it harder to afford one of those fancy California homes sold on HGTV. This is a tough housing market, and it’s about to get more challenging with the unemployment rate expected to rise in the months ahead. We’ll discuss how to trade this trend next week.
- As you know, Roger Scott is a big fan of algorithmic- and indicator-based trading systems. And he’s been working on an indicator that spots overbought and oversold levels. He calls it his “Quantum Indicator.” To learn more about this new strategy, how it works and how easy it is to use, go here to watch his special presentation.
To your wealth,
Garrett
