BY STEPHEN MCBRIDE
If you were to set up an investing Hall of Fame, it would be filled with names like Stan Druckenmiller, George Soros, Carl Icahn, and David Einhorn.
These experts have shown an uncanny ability to surpass the market over long periods of time. They stay a step ahead of retail investors through better macro-economic analysis.
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There’s no secret formula to their success. But their investments hint at both the risks and prospects they see in the markets.
Over the past year, these experts, among other well-known investors such as Paul Singer (Elliott Management), John Paulson (Paulson & Co), and David Rosenberg (Gluskin Sheff), have all made large buys and bullish predictions in one asset: gold.
Here’s what’s driving the gold rally
For reasons many are aware of, major institutional investors have turned bullish on gold. Their buys have thrust the price almost $300/oz. since December 2015.
Gold’s rally is driven by a few worries. Chief among them is the more than $13 trillion of government debt with negative yields.
Other concerns include feeble global growth and a decade of loose fiscal policy by the US Federal Reserve. And the Bank of Japan has an even longer history of bad policy .
Despite forecasts of higher interest rates, bond prices keep moving up. This forces yields down. Bond yields in Japan and many parts of Europe have reached negative levels.
Another $15 trillion of government debt yields between 0 and 1%. And only 6% of government debt provides an interest rate better than 2%. This has forced many income-seeking investors into stocks and other things. This influx drives some equity sectors and real estate markets to sky-high valuations.
As recently as December 2015, the Fed forecast four interest rate hikes in 2016. The Fed has only three more meetings this year. And one of them is in the US presidential election month.
So it isn’t likely the Fed will make even two hikes this year. Continued mixed economic data and international risks may put the Fed on hold until 2017.
Surprisingly, these things occurred while both the stock and bond markets have made multi-year highs, nearly at the same time.
Many veteran investors view gold as a currency. This is due to central bank actions, continually low interest rates, and stretched valuations.
In May, speaking at the Sohn Investment Conference, Stan Druckenmiller went on record stating:
As bankers experiment with the absurd notion of negative interest rates, we’re wagering on gold. Some regard it as a metal. We regard it as a currency, and it remains our largest currency allocation.
According to recent filings, gold-related investments make up about 18% of his holdings.
Investors used to see low rates as a headwind for gold. Now, though, they see it as another reason to own the metal.
Gold could also benefit from years of quantitative easing (QE) by the US Federal Reserve and other central banks. This is because QE could lead to higher inflation and interest rates.
Even if the Fed rate were to quadruple rates (from the current 0.5% to 2%), they would still be historically low. And taking inflation into account, that 2% could even end up negative.
Gold is a safe haven asset
Rising rates would most likely cause dividend stocks (like utilities) and US bond prices to plummet. Doubtless, some of this money would seek safe haven assets such as gold.
In addition to physical gold, ETFs, and derivatives, many institutional investors are piling into gold miners such as Barrick Gold and Newmont Mining.
We’re not urging you to try to ride the coattails of these investors or chase “hot” sectors, but their recent actions and statements about gold deserve some serious thought.
Devoting a portion of your portfolio to gold can help reduce volatility. Evidence shows that gold can increase overall long-term performance.
Gold provides insurance during recession
Gold in its most basic form—bullion—serves as insurance against unforeseen financial events, geopolitical risks, and outside shocks.
The recent “Brexit” vote is one example. In the weeks following the UK’s vote to leave the EU, gold surged over $100/oz. And it has held most of that gain since.
While a US recession does not seem to be a threat right now, it will happen sooner or later. Gold has served its purpose as insurance during such times in the past.
There have been seven recessions since 1965. Notice how gold has performed.
In five of the seven recessions, the gold price rose. And three of those times, it soared double digits. In only one recession did gold suffer a marked decline, -9.1% in 1990. Even in the midst of the 2008–2009 crisis, gold moved higher.
This makes sense when you think about it. A slowing economy stokes investor worry, and gold is a natural refuge in times of economic stress.
Some claims can be made for owning gold at any time, but there are times the reasons are more obvious. And while you should always perform due diligence before making any investment decision, sometimes the best information is right in front of you.
Warning signs are flashing around the world, and “Hall-of-Fame” investors are turning to the one asset that has stood the test of time. Gold.
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