You Can’t Time Gold, but Own it Anyway
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Will it ever be gold’s time to shine?
After breaching the historic $2,000 an ounce mark nearly two years ago, gold investors have largely been disappointed by the yellow metal’s performance.
And who can blame them? It was an ideal set up.
Central banks were printing money at an unprecedented pace. Governments were piling onto their mountains of national debt. And as COVID-19 ripped through the global population, it was unclear when a vaccine would be approved.
Against this backdrop of uncertainty and fiat currency destruction, gold price gains seemed all but certain.
Yet, gold has languished. And at a time when inflation is sky high!
Expect interest in gold to return. Like the early days of the COVID pandemic, there is plenty of uncertainty to spark such an interest. Russia’s invasion of Ukraine has pushed geopolitics to the forefront of investors’ concerns.
Investors were tuned out last year when it came to geopolitical risk. But following the invasion of Ukraine, they are out of bed, dressed, and already working on their third pot of coffee. In other words – alert!
Whether it’s North Korea firing hypersonic missiles, Chinese warplanes flying into Taiwan’s air defense zone, or any number of other risks that are less of a headline (Islamic State terrorist attacks, for example), any perceived increase to global instability will drive demand for gold higher as long as investors remain as sensitive to the geopolitical environment as they are today. After all, investors have turned to gold as a safe-haven asset during troubled times.
But when it comes to geopolitics, it’s not just troops and terrorists that can fuel gold’s rise. In response to Russia’s invasion of Ukraine, sanctions by the U.S. and allies have effectively rendered useless about $300 billion of Russia’s foreign reserves.
This weaponization of fiat currencies is forcing other countries to consider that they too may someday see their foreign reserves frozen – and to consider reserves that can’t so readily be seized. Gold in a vault is an attractive alternative. It can’t be deleted with a few keystrokes.
And then there’s inflation…
The International Monetary Fund projects inflation of 6.6% in advanced economies and 9.5% in emerging and developing economies this year. Inflation in the United States is barely off its 40-year high. With supply-chain woes lingering, energy prices elevated, and a persistently tight labor market, expect inflation to stick around for a while (whether we’ve reached the peak or not).
Inflation’s First Comeback Since the 70s (don’t tell disco)
Source: Bloomberg. January 1970 – August 2022.
There’s nothing overly complex about the investment implications. Inflation erodes purchasing power and wealth. The higher inflation gets, the more attractive a store of value becomes. And gold has a track record of storing value that goes back thousands of years. The longer inflation hangs around, the more it should drive demand for gold.
Getting the timing right, however, is another matter entirely.
The Price of Gold: Spikes and Sorrows
Source: Macrotrends as of August 10, 2022.
The inflation-adjusted chart above demonstrates what long-time gold investors already know. The price of gold is characterized by incredibly violent and relatively short-lived spikes to the upside, followed by years (sometimes decades!) of underperformance.
This isn’t always evident along the way. There are plenty of head fakes. What seems like a rally ultimately proves to have been the precursor to the next leg down.
It’s a tough path to walk. Unpredictable. Chock full of disappointment.
Even so… you should own gold.
That’s not predicated on any short-term market timing call. I can’t tell you what the price of gold will be in the next month, quarter, or year. Same for inflation. I’m not in the geopolitical prediction game either. As a wise Yogi once said, “it’s tough to make predictions, especially about the future.”
But here’s one thing I do know. Paper money has a way of losing value over time. Take a look.
US Dollar Purchasing Power. Try to Spot the Trend.
Source: Federal Reserve Bank of St. Louis as of August 10, 2022.
This isn’t unique to the dollar. It’s the case for all fiat currencies over time. And it’s why owning gold in your portfolio makes sense. Always.
Michael Joseph, CFA is a vice president and deputy chief investment officer at Stansberry Asset Management. He is a member of the CFA Institute’s Practice Analysis Working Body and sits on the board of the i.d.e.a. Museum Foundation and the advisory board of the Arizona Council on Economic Education. He can be contacted at [email protected].