After a rough start in the stock market this year, it is a relief that Valentine’s Day is around the corner. Market participants, including financial advisors’ clients, can use a little love about now. One of the most tangible ways that advisors can show affection to their clients at this time is to add precious metals exposure to their portfolios.
As the chart below indicates, gold prices tumbled almost 45% between the September 2011 highs and the November 2015 lows. Adjusted for movements in the Standard & Poor’s 500 equity index, the decline was almost 70%!
Since November, gold prices have recovered 5%. We believe that this may be the beginning of a new bull market in gold and other precious metals.
In the past, gold prices have declined along with stock prices in the first phase of an equity bear market. At some point in the bear markets, as indicated in the graph below, gold prices begin to rise and become a safe haven for investors. This is aided by declining interest rates, which reduces the cost of owing gold bullion. After stocks peaked in early 2000, gold and stocks declined together until April 2001 when gold prices began to rise as the equity bear market continued for almost two more years. The same pattern took place after stocks peaked in late 2007. Gold bottomed in November 2008, one-half year before stocks began to rise. Although past performance is not indicative of future returns, given the deep bear market in gold prices, especially in relations to stock prices and declining interest rates, we believe that the bottom in gold is near, if not already in place.
Additional Source: Gann Global Financial
Investment implications: Financial advisors should consider adding precious metal bullion and stock funds to client portfolios. These funds were up 5% to 8% in January. As discussed above, we believe that gold has likely put in a cyclical low in November/December and will earn positive results in 2016.
