A perfect storm is brewing. Will gold shine the brightest??
What to think about when investing in gold and what could be on the horizon for investors in the shiny stuff......
They say beauty is in the eye of the beholder. Much the same could be said of the value of gold. I’m not talking jewellery here, but gold as an asset class.
In recent times the gold price has been performing pretty much as we’d expect. It’s been rising as real interest rates (interest rates minus inflation) fall. However, gold is supposed to react to difficult political and economic times too. Unlike currencies, you can’t print infinitely more gold, and there’s only a small supply of it. This had led some people to argue it’s a store of real value and its value is constant regardless of inflation.
My point is that all sorts of theories and conspiracies surround gold. Valuing gold is difficult and that makes it difficult to talk about and can make it confusing for investors.
Gold generally hasn’t been a great investment. The price has spiked now and again, but it's not been since the late 70s and early 80s has it really shone.
I’ve been a fan this year, as I see investors fretting about falling bond yields causing increased inflation. The thought behind this is that central bank lockdown-related-largesse will unleash inflationary pressures as demand outstrips supply and pushing prices up. When gold recently topped $2,000 we saw a flurry of media stories on it. That has in the past been a sign of some profit taking as people chase that fabled dollar!
That is exactly what happened in this case, with the gold price falling back to $1,930 a few days later.
I believe gold has the potential to rise further, as Covid-19 acts as the catalyst for change. Having said that, I don’t believe investors should become too carried away with it over the shorter-term.
Why?
Because I see deflation as the real threat to the economy in the next six months to a year, rather than high inflation. Covid-19 has exaggerated existing themes in the global economy, both for good and bad. Big secular forces include:
- ageing populations (people in retirement spend less)
- technology (which bears down on costs through better service and transparency)
- a world which has huge amounts of debt (making growth harder).
This will be reinforced as Covid-19 has shut down huge swathes of the global economy, causing huge rises in unemployment and bankruptcies. The result will likely be a significant fall in demand later this year and into 2021. That could cause markets and prices to fall, and I don’t think the gold price will be immune.
Yet ironically, I think this is also sowing the seeds of future inflation.
Central Banks have massively increased their balance sheets to try and stave off the crisis. Governments too will be spending vast amounts on infrastructure to keep economies moving forward and supply employment. All that would drive a big pickup in inflation. Higher inflation means higher interest rates, but I think interest rates will be below the prevailing rate of inflation. This is known as financial repression. Those with cash and on fixed incomes will be especially vulnerable.
It is at this stage I think gold could really take off as investors rush to protect the real value of their savings. It will take time for these things to develop, so I’m thinking maybe we start to see the big up in 2022 and then it gradually goes higher into this decade.
I think the times are changing. This decade will look very different to the last four. We all need to be more alive to the challenges, but in due course I think gold could be one of the beneficiaries, though of course there are no guarantees. Gold is viewed by many as the quintessential safe haven. If inflation rips through the value of cash, or the entire global economy crashes, you will still have your gold, but while gold might be physically unchanged, the pounds and pence value of the yellow metal is far less dependable.
Gold shouldn’t be looked at as a one-way bet, or even a safe haven. However, should inflation rise in the years to come, and there are plenty of reasons to think it might, it could be a good addition to a diversified portfolio. Traditionally investors have been warned to keep commodities and other ‘alternative investments’ to a small proportion of the overall portfolio – say 5%. That’s probably still sensible. But if inflation starts to gather pace over the next couple of years and bonds start to suffer then a larger allocation could come into its own, although there are no guarantees.
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Deflation...Inflation...Some have said Gold/precious metals should be treated as an insurance policy. This is true, but so much more...for as much as the banks hate metals they keep stacking.
Keep stacking my friend!!! 😀
If we just look at the balance sheet expansion by the Federal Reserve, it indicates that high to very high inflation is coming. In addition, near-zero rates will stay through 2023. Fiat money will depreciate and hard assets like gold will trend higher. The supply of gold can never be increased at the pace at which the supply of fiat money can be increased. So all fiat currencies will go down in value against gold.