Gold has performed well since we suggested it in late February and late July.
The precious metal is up 13% and 6%, respectively, from those dates, compared with an increase of only 3.4% in the S&P 500 SPX, +0.80% since February and a 3.8% decline in the index since late July.
Given the big outperformance in gold, it’s time to check back in with my gold gurus for a read on what you should do with gold now…
The bottom line: In the near term, gold may cool off, as more positive economic data calms recession fears. In the medium term, there are still many solid reasons to own the yellow metal and gold miners in exchange traded funds, such as the VanEck Vectors Gold Miners ETF GDX, +0.18% and the VanEck Vectors Junior Gold Miners ETF GDXJ, +0.40%.
In the short term, the next move in gold really comes down to what happens with the economy.
Let’s take a closer look.
“If economic reports calm people down about imminent recession, I don’t see where gold is going to be a great investment,” says Leuthold Group chief investment strategist James Paulsen.
But we aren’t going to see a recession near-term so gold prices may remain flat or even fall — for three reasons.
1. President Trump needs a strong economy to get re-elected. Like him or not, he has a lot of influence over business and consumer confidence and the economy. Impeachment proceedings won’t hurt sentiment because Democrats are 20 votes shy in the Senate of the two-thirds majority they need to remove him from office.
2. The inverted yield curve signal is a head fake. It’s not telling us recession is at hand. Yields at the long end of the curve are artificially suppressed by foreign buyers of U.S. debt trying to avoid negative yields in their home markets. Yes, it’s different this time.
3. The U.S. economy has been showing signs of a rebound. Hard economic numbers show strength — like industrial production, capacity utilization, employment, home sales, auto sales, personal income and retail spending, notes Paulsen.
This undercuts the significance of the National Association of Purchasing Managers (NAPM) Index’s manufacturing numbers that spooked investors this week. So does the fact that these numbers are merely “soft” survey-based data. They matter, but they are less meaningful since they are based on opinions in surveys.
“I can see why people are skittish,” says Paulsen, citing headlines about impeachment and ongoing bad news on the China trade front, including possible U.S. restrictions on capital flows to China. “You can certainly understand how people might not feel good about the world. But that is different from how the world is doing.”
What he means is the NAPM survey data is weak because of all the scary headlines. But the hard economic data is good.
The key takeaway: No recession nearby, so gold flat-lines.
Still, it’s worth owning some gold and gold-mining shares for five reasons.
1. Gold helps you play defense
A big risk now is that people talk the economy into recession by damaging business and consumer confidence. It would not be the first time that worries about recession became a self-fulfilling prophesy. “I give it 25% odds that we scare ourselves into recession. I do think it is a risk, but I don’t think it is the most likely outcome,” says Paulsen.
Gold also offers investors a safe haven against political headline risk and uncertainties spawned by U.K. leadership changes, Brexit and the U.S.-China trade dispute tensions, says Chris Terry, a gold and metals analyst at Deutsche Bank.
2. Central banks love gold again
Central banks are purchasing gold in volumes not seen in 50 years, points out Tom Winmill, who manages the Midas Fund MIDSX, +1.54%. Given that the dollar has been so strong, central banks are diversifying away from the greenback. The biggest buying is coming from Russia, China and Poland.
3. The U.S. may be on course to debase the dollar
As both political parties throw caution to the wind on deficit spending, the U.S. is now borrowing almost a trillion dollars a year. About 22% of the federal budget is financed by debt. The U.S. debt-to-GDP ratio could hit nearly 100% over the next decade, from around 78% now, according to government estimates.
Typically governments resort to inflation to reduce debt burdens like these, says Winmill, and he thinks the U.S. is now on that course. Gold usually performs well when inflation heats up and the dollar weakens.
Even if that does not happen right away, the tight labor market may produce wage growth-based inflation that spikes gold.
“I would not be surprised to see gold at $2,000 an ounce in two years,” says Winmill. Near-term he’s neutral on gold in part because a fourth of gold demand comes from jewelry purchases, which cools when gold prices rise as much as they have this year…
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