Pundit's Perspectives – Thu 28 May, 2015
A Bloomberg article that is positive on gold!
That’s right, I came across this article today on the home page of Bloomberg. It would sure be nice to see some more gold positive articles consistently posted on mainstream media websites. But when that happens the price will be much higher.
Opinion: Gold can glitter if stocks hit the rocks
By Jeff Reeves
For the record, I am no gold bug.
In fact, last September I wrote in this column that gold may be “tarnished for good” and would continue to stumble — and aside from a short-lived head-fake in February, that has proven true.
But given the continued volatility in the stock market and the risk of a correction, it’s worth considering a targeted bet on the precious metal.
I know gold is an emotional topic — particularly for those of you who have the text of Executive Order 6102 memorized. I also know there is a lot of money to be made in fear-mongering around precious metals, particularly if you’re an aging pop-culture icon.
But with gold, as with all investments, it’s important to be as dispassionate as possible and simply look at the market dynamics instead of the clever narratives whipped up by a marketing team.
And an objective look at gold hints that the precious metal, at least at current levels, might not be a bad long-term bet for certain investors.
It’s all part of your investing strategy, of course, and I would never advocate anyone place more than 5% or so of their total assets in a volatile commodity like gold.
But if you’re of the precious-metal persuasion — or at least agnostic about gold and willing to go where the market takes you — here are some factors to consider.
1. Supply and demand
The first item in favor of gold is basic supply and demand.
Sure, overall global demand for gold has been a bit soft lately, falling to about 4,212 tonnes in 2014 according to the World Gold Council, down from 4,436 tonnes in 2013 and down from a high of 4,582 tonnes in 2011 at gold’s recent peak.
But it’s important to remember that emerging-market demand remains strong, and that total demand is still up from pre-recession lows of around 3,100 tonnes or less worldwide.
So in the long run, it’s not like gold has been abandoned. Quite the opposite, given a roughly 40% jump in demand over the past 10 years.
Furthermore, it’s crucial to remember that production cycles span years and don’t adjust well to short-term fluctuations. A gold mine can take five years or more to hit full production, and similarly, a mining company may take just as long to reduce exploration and production to meet new supply/demand dynamics.
Late last year as gold threatened to sink below $1,200, it wasn’t realistic to think that all production would stop and gold would rebound in a hurry. But now that prices have been persistently lower than the all-important price of $1,200 — the widely touted “all-in” production cost per ounce for the typical mining company — we should start to see slowdowns and cutbacks take effect across 2015 and into 2016.
Every company is different, of course. The Wall Street Journal recently reported a breakeven price of $1,168 on gold, according to gold miners covered by BMO Equity Research, and mining giant Goldcorp GG, +0.68% revealed in a recent filing that its all-in costs were even lower at $1,035 an ounce. Furthermore, some companies undoubtedly will continue to operate at or below breakeven on the hope that prices will resolve longer-term — and because immediate cash-flow needs demand some gold be brought to market regardless of price.
But eventually, this supply-and-demand equation will resolve itself. When it does, there will be a floor under gold and perhaps the impetus for a move higher.
2. No true ‘risk-off’ market yet
It’s a bit of a myth that Wall Street has been gyrating between “risk-on” and “risk-off” since the 2008 financial crisis. In fact, corporate and government bonds and other bedrock investments have remained on the outs for quite some time simply because of persistently low interest rates.
Just look at the countless articles about the “TINA market” we are in — that is, the “there is no alternative” market.
Should it come as any surprise that gold prices peaked in 2011 and have been in a seemingly endless slide ever since, even as the stock market has continued to grind higher?
But the story may be vastly different as 2015 becomes less favorable for U.S. stocks. Consider that according to the latest data from FactSet, the blended earnings growth rate of the S&P 500 SPX, -0.33% in the first-quarter of 2015 was an anemic 0.3%! Furthermore, economists are now predicting that first-quarter GDP growth for the U.S. was likely negative thanks to a sharp widening in the trade deficit — hinting at the beginning of another recession if things don’t get turned around.
It doesn’t bode well for stocks, particularly as the market continues to hit new highs. Valuations vs. earnings and sales are stretched as a result of this no-growth backdrop.
All bets may be off if we see a correction in equities, coupled with a rising-rate environment that threatens big principal losses for anyone in long-term bond funds. In such a world, gold may be quite attractive — particularly to investors focused on protecting the profits they’ve made after a big run for stocks.
3. Gold can rise along with interest rates
The easiest way to defuse talk of rising gold prices lately has been to point out the strength of the U.S. dollar as a ceiling on commodity prices, and note that monetary policy will only get tighter going forward — cementing this headwind for gold.
But there is plenty of precedent for gold mounting a big multiyear run even during a period of significant rate tightening and a strengthening U.S. dollar DXY, -0.26% .
That’s what happened from 1976 to early 1980, when gold went from around $105 an ounce to about $850. At the same time, the effective federal funds rate went from about 5% to a brief high of about 20% during that period to mark an all-time high.
That 700%-plus gain for gold trounces a roughly 30% gain for the S&P 500 in the same period.
Gold also rose along with interest rates in 2001 through the end of 2005, when the dot-com bubble burst. A flight to gold pumped up the precious metal from lows of about $260 to a peak of about $725 by early 2006, and central bankers raised key interest rates from under 2% at the end of 2001 to 5.25% in roughly the same period.
Stocks went basically nowhere even as gold went on this roughly 180% run during that period, too.
It’s happened before, the bulls say, so why not again?
In the interest of telling the whole story, I must point out it’s incredibly reductive to compare the monetary policies of the late 1970s and the Internet bubble to the current environment. Though some never believe in the phrase “this time is different,” fighting through a global financial crisis with the help of quantitative easing around the world is indeed a new chapter in central banking — and inherently different.
But taking into account those caveats, there is historical evidence of gold rising significantly even as rates rise and the dollar moves higher. Why not this time, indeed.