Six Reasons To Buy Gold In 2016 by Evergreen Gavekal
“Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.” – Charles De Gaulle, Leader of the French resistance during WWII and 18th President of France
- Gold bullion and gold mining stocks have rallied 18% and 51%, respectively, in recent months after a brutal bear market over the last five years.
- Given gold’s proven ability to hold its value in the face of rising inflation and reckless monetary policy, we believe it plays an important role in any diversified portfolio.
- At Evergreen Gavekal, we believe it may be time to to start initiating or adding to additional gold holdings for six reasons.
- Technical trading patterns suggest gold may finally be breaking out into a bull market (we do caution, however, that it appears to be temporarily over-bought).
- Gold remains out of favor despite the recent rally.
- The Fed’s ability to hike nominal interest rates is constrained.
- The overpriced US dollar has limited room to run.
- Real interest rates are heading lower around the world as central banks get creative.
- Physical gold may be difficult to acquire in the coming years.
Six Reasons To Buy Gold In 2016
The following commentary is from the Evergreen Investment Team:
Gold is one of the most hated asset classes on the planet.
In Wall Street’s eyes, it’s never been a legitimate investment. Gold reports no quarterly earnings, pays no dividend, and (until the rise of the launch of the SPDR Gold Trust ETF* in 2004, along with a flurry of similar products and services in recent years) generates no sales commissions for brokers still advising the majority of American investors.
But try as they may to paint the yellow metal as a “barbarous relic” or a “pet rock,” the financial establishment can’t change the fact that gold is money in virtually every country and every community on the planet.
While the average life of a fiat currency has been just twenty seven years and the average life of a reserve currency has been just ninety five years throughout the modern era, gold has held its value over millennia.
For example, an ounce of gold supposedly bought 350 loaves of bread in ancient Babylon (about $3.51 per loaf today) and first century Roman Centurions earned about 38.58 ounces of gold each year (about $47.5K today). Those numbers are remarkably close to today’s prices.
Needless to say, gold has stood the test of time.
From that perspective, the yellow metal’s proven ability to hold its value as the purchasing power of paper money erodes makes it an excellent long-term hedge against inflation and a safe haven in the face of governments and/or central banks gone wild.
So the shiny stuff should have been the perfect investment in a world where major central banks increased their collective balance sheets by almost $10 trillion, right?
Conventional wisdom in 2009 and 2010 argued that ultra-low nominal interest rates and quantitative easing (i.e., massive money manufacturing) would inevitably lead to hyperinflation, that the US dollar and US Treasury bonds would collapse, and that gold would soon be the only safe haven left. But the consensus among gold bugs, dollar doubters, and bond bears was dead wrong… at least in terms of timing.
Instead of accelerating into an uncontrollable wage-price spiral, inflation has languished and inflation expectations have collapsed along with the price of almost every commodity.
Thus far, all that money printing has done nothing but encourage another $60 trillion in global debt growth according to a recent study by the McKinsey Global Institute. Rather than looking like Zimbabwe in 2008 or Weimar Germany in 1923, the United States and Europe are looking more and more like Japan with each passing year.
To be clear, we still don’t know where this debt-paved road will ultimately lead. Japan may yet fall into hyperinflation as the yen collapses from ¥111/$ today to ¥200/$ before we know it.
But thus far, the country’s massive debt load (660%+ of GDP) is weighing on growth and dragging the country toward outright deflation. Moreover, the Eurozone (debt 460%+ of GDP) and the United States (debt 350%+ of GDP) also appear to have hit the point of diminishing return when it comes to layering on more IOUs.
That’s why—as a result of diverging monetary policy between the less indebted United States and our more indebted peers—the US dollar has gained in excess of 30% and long-dated US Treasuries have returned more than 45% over the last five years. During that same timeframe, the price of gold bullion declined nearly 40% and gold mining stocks collapsed by a whopping 70%.
Needless to say, all those who abandoned diversified portfolios for the “safety” of gold have lost a considerable share of their purchasing power while US stocks more than doubled over the same period.
It’s no wonder that gold has lost its glitter for most investors, but as billionaire resources investor Rick Rule recently noted, “These periods of deep despair are the necessary component, the necessary factor to turn a bear market into a bull market.” Unsurprisingly, the towering in-flows that went into the gold exchange traded fund (GLD) when bullion was rising back in 2009 through 2011, turned into relentless out-flows during its multi-year decline. As is so often the case, the redemptions hit a crescendo as gold prices were nearing their lows, clearly reflecting the “deep despair” that typically occurs at bear market troughs.
Gold ETF In-Flows And Out-Flows vs Gold Price
Source: Evergreen Gavekal, Bloomberg
At Evergreen Gavekal, we believe low valuations and entrenched bearishness on top of a fundamentally improving outlook (as we’re seeing in the market for gold bullion and gold miners) are the hallmarks of emerging opportunities. Conversely, high valuations and resilient optimism on top of a fundamentally deteriorating outlook (as we’re seeing in US equities) are the hallmarks of imminent corrections.
Reaping a profit from this still-reviled asset class will require discipline and patience, but we believe we are approaching a good re-entry point for gold and gold miners for six reasons.
(1) Technical trading patterns suggest gold may finally be breaking out into a bull market.
Year-to-date, gold prices have leaped by more than 18% and gold mining stocks have surged by more than 50% as the trade weighted US dollar softened.
Although we believe gold is currently short-term overbought here…
Gold Price (Top Chart) Investor Sentiment Toward Gold (Bottom Chart)
…technical trading patterns suggest the yellow metal may be rounding the corner and getting ready to break out into a full-fledged bull market.
(2) Despite the recent rally, gold remains remarkably out-of-favor.
Despite the surge we’ve seen in gold and gold miner stock prices in recent months, attitudes don’t change overnight. Trading volume and upside volatility are coming back, but investor’s hesitant re-embrace of gold may signal an even bigger shift in global sentiment. Buying gold today may be comparable to buying