Gold will keep rising – here are 13 ways to profit from the rally

Release Date:  Friday, February 22, 2019

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Gold and Silver Prices

Gold closed higher on Friday and had its second straight weekly gain with a weakened dollar, concerns about a global slowdown and investors awaiting signals on U.S. and China trade talks.

"'The market is expecting the dollar to weaken. We expect growth in the U.S. to slow,' said Natixis analyst Bernard Dahdah.

"The dollar index fell 0.16 percent versus six major currencies on Friday and set for its biggest weekly fall in a month. The U.S. currency, which has been a refuge for investors during the U.S.-China trade spat, has come under pressure on signs of a breakthrough in talks.

"Minutes of the U.S. Federal Reserve's last meeting painted a less dovish picture than expected on future interest rates hikes, weighing on gold in the last two sessions. Higher rates reduce investor interest in non-yielding bullion.

"But data showing new orders for key U.S.-made capital goods unexpectedly fell in December, revived some market expectations that the central bank would halt the 2019 rate hike cycle.

"It added to jitters about a slowdown in Europe and China, which analysts said bolstered the appeal of gold, considered a safe haven in times of uncertainty.

"'The main target (for gold) is still the technically important area between $1,350 and $1,360 above which would be a one-year high,' said Ronan Manly, a precious metals analyst at BullionStar Singapore." ("Gold headed for second weekly gain on growth concerns, Reuters, CNBC, 02/22/19.)

Gold ended the week up $6.90, closing at $1,327.80. Silver ended the week up $0.14, closing at $15.90.

Gold will keep rising - here are 13 ways to profit from the rally - Brush

There are eight solid reasons to be bullish on gold and analysts at Goldman Sachs believe the metal will go up as much as 8% a year from now.

"Gold has rallied 12% since last August, but it's still a buy. So are gold mining stocks. The metal and mining companies look like a good hedge against possible global turbulence, stagflation or recession ahead. Gold is a play on possible dollar weakness, too.

"'I remain very positive and constructive on gold," says Frank Holmes, the CEO and chief investment officer at U.S. Global Investors…

"Gold analysts at Goldman Sachs think the metal will rally 4% to $1375 an ounce by this summer, and around 8% to hit $1425 an ounce a year from now.

"That may not sound like a lot. But given the defensive characteristics of gold, those gains will look pretty nice in your portfolio if fears of inflation or recession - or some geopolitical crisis - put the S&P 500 into a downward spiral again.

"Here are eight reasons to be bullish on gold…

"Declining bond yields: Yields on U.S. Treasurys have fallen sharply since last fall. Due to economic weakness in the U.S. they may fall further, now that the Fed has turned more dovish. This can be good for gold because it lowers the opportunity cost of owning an asset with no earnings and a negative return on equity because of storage costs.

"A weakening dollar: Declining U.S. bond yields are one factor that will lead to a weaker dollar DXY, -0.14%  . So will improving economies outside the U.S., as foreign central banks take action to spur growth. A declining dollar is good for gold because gold trades inversely to the dollar. "Gold trades off the dollar and the dollar trades off real interest rates," says Holmes.

"Central banks sucking up supply: You may think your student loans are a burden. But they are just a drop in the bucket compared to overall debt levels around the world. Global debt recently reached $244 trillion, or more than three times the size of the global economy, according to the Institute of International Finance.

"The risks and uncertainties created by this huge global debt burden are a part of the reason central banks are big buyers of gold again, says Holmes. Central bank gold buying rose 130% in the fourth quarter, and 2018 purchases came in at 650 tons, according to the World Gold Council. That was the highest level since Richard Nixon was elected in 1968. The World Gold Council thinks central banks could buy even more gold this year.

"Fear factor: Central banks like to hold gold as a form of 'safe' reserves that protect against turmoil during troubled times. You should take a page from their book and keep at least 5% of your portfolio in gold for the same reason. Gold has role in capital preservation,' says Tom Winmill, portfolio manager of the Midas Fund… 'Gold will preserve its value when everything else is going down, and that's a wonderful thing.'

"If worries about inflation and recession return, or geopolitical tensions crop up, you won't be the only one looking to gold for ballast. Other investors will do the same thing, and that will drive up the price of gold. 'We continue to see upside to gold primarily driven by the demand for gold for portfolio diversification,' Goldman Sachs gold analysts wrote in a recent note. Slower U.S. growth and falling unemployment will keep investors worried that the U.S. economy is in the late stages of its current cycle, say these analysts, which will support gold demand.

"A deal on trade: A resolution would boost the outlook for China's economy, which would in turn boost commodity prices. That's because China accounts for about half the consumption of global commodities, says Holmes. A key indicator to watch is China's purchasing managers index, he says. Look for a move above 50 again, because this will signal that China's economic growth is improving. That will support an increase in demand for commodities - and gold - both from China and from investors trying to get in ahead of increased China buying.

"All you need is love: Better growth in China would help gold for another reason. 'It's all about love,' says Holmes. He thinks about 60% of demand for gold comes from people buying gold jewelry as an expression of love and affection. This kind of spending is correlated with GDP growth. 'The greater the GDP per capita the more gold people buy,' says Holmes. This effect is especially strong in China.

"Supply shortages: The last boom in investments in gold mines peaked in 2011, because that is when gold prices peaked as well. So by now, mining production is coming down, says Winmill, one of the reasons he is bullish on gold over the 3-5 year time horizon.

"Technical factors: Since gold fell in 2012-13, it has repeatedly bumped into resistance at $1,340-$1,350 an ounce. If it breaks through this level, it will be a bullish technical signal that could suggest it keeps going higher, says James Paulsen, chief investment strategist at The Leuthold Group." ("Gold will keep rising - here are 13 ways to profit from the rally," Michael Brush, Market Watch, 02/22/19.)

Gold Rises as Investors Panic and Pile Into Bullion - Constable

Concerns about returns from financial assets have investors turning to bullion.

"Gold prices were rising again as scared investors seek refuge from paltry bonds yields.

"The metal recently fetched $1,344 a troy ounce, a level it hadn't seen since April 2018, or 10 months ago, according to data from Bloomberg. It has also rallied more than 14% since the low of $1,174 in August…

Fed Flip-Flop

"The top catalyst for the bounce in bullion prices is the change in tack by the Federal Reserve. It shifted its tone on possible future changes in its monetary policy. Whereas a few months ago investors generally expected multiple increases in the cost of borrowing during 2019, that's now changed and it is even possible that the Fed could cut interest rates later this year if the economy looks weak enough to warrant such a change.

"'Ever since the Fed changed its aggressive stance, gold is looking more attractive,' said Jack Ablin, chief investment officer at Chicago-based wealth management firm Cresset Capital Management.

"When interest rates were expected to rise, then the choice between gold and interest-bearing bonds was simple. Bonds held the edge over the metal because the rising interest rates would help investors maintain the purchasing power of their portfolio. In other words, their investments would grow at least as much as inflation.

"However, now that a rising rate environment doesn't look so likely to occur, investors are worrying about how to maintain the inflation-adjusted value of their portfolio. At such times, like now, investors like bullion better.

"'If short-term financial assets offer returns more than inflation then people prefer financial assets, if not then they like to buy gold,' said Ablin.

"Gold has a history of helping investors maintain the real or inflation-adjusted value of their portfolio at times when other financial assets do not. The 1970s is an example. At that time stocks were in a bear market, while at the same time the value of gold jumped from $35 an ounce in 1971 to more than $800 by the end of that decade.

Crunch Time in the Eurozone

"The Fed's flip-flop isn't the only thing propelling gold prices higher. The slowdown in Europe's single currency area, the so-called eurozone, is also helping boost bullion prices. Italy already is officially in a recession and Germany's economy, the largest in the European Union, looks weak.

"'The eurozone is in huge difficulties, and that means more negative interest rates,' said Don Coxe, chairman of Chicago-based financial firm Coxe Advisors. 'Negative-yield bonds make gold look better than it would otherwise.'

"In normal times, bonds offer two things. The first is the regular payment of interest in the form of cash coupons. The second is that you get back the face value of the bond at the end of life of the security.

"That doesn't happen when the bonds have yields that are less than zero, as is the case with some of the European government bonds. German government securities, or bunds, for two-year and five-year durations now have negative interest rates, according to Bloomberg data.

"'Negative yield bonds have a built-in loss,' said Coxe. He noted that when investors buy gold, they might lose money in the short term, but then again they might make money. But bonds with negative interest rates have a built-in way to deplete the value of your investment, he explained.

"In all cases, gold, which doesn't provide any yield, suddenly looks more attractive than government securities that have negative interest rates.

Mining Mergers

"A recent spate of mergers in the gold mining sector has highlighted a likely future hiccup in gold supply starting soon.
"'The mergers revealed that there is going to be a shortage of gold in the early 2020s,' said Coxe.

"While there is a lot of gold held in vaults across the world, it is rare to see a period when there is a year of net disinvestment of the metal by investors. Mostly, investors as a group snap up gold year after year. 

"He explained that the gold deposits available to miners are increasingly those that produce low-grade ore. In other words, the gold is there, but the amount of gold per ton of rock is dwindling in the industry.

"When the ore is lower grade, it costs mining companies more to extract an ounce of gold than it typically does for higher grade ore.

"The net result is that less gold supply will hit the market than had previously been envisioned. Combine that with the increased demand for the metal and you likely have higher gold prices coming along soon." (Gold Rises as Investors Panic and Pile Into Bullion," Simon Constable, TheStreet, 02/20/19.)

Wary Investors Reach for Gold - Iosebashvili

Gold prices are going higher as it's sought as a portfolio hedge due to uncertainty about global growth.

"Investors are buying gold again as concerns about a slowing global economy are putting a premium on safer investments.

"Gold prices are up 14% since late August, when the Nasdaq Composite Index last hit a fresh record, and stand at their highest level since last April. Gold-focused exchange-traded-funds notched nearly 72 tons of inflows last month, exceeding their total for all of 2018, according to the World Gold Council.

"Fresh worries about the health of major economies in Europe have quelled the expected rise in global interest rates this year, boosting the stock of negative-yielding government bonds. Gold draws more investor interest when borrowing costs fall, in part because lower rates reduce the disadvantages of holding a non-yield-bearing asset and in part because the lower rates are a function of economic uncertainty.

"That has made gold a compelling choice for money managers seeking to hedge their portfolios at a time of anxiety over economic growth and trade conflicts between the U.S. and its partners, said George Gero, managing director at RBC Capital Markets.

"'Everywhere they look, investors see problems,' Mr. Gero said.

"Gold buyers are taking heart in suggestions by Federal Reserve officials that the central bank may refrain from raising rates this year. Fed funds futures, which investors use to bet on the direction of Fed policy, late Wednesday showed that 9% believe rates will fall this year, while nearly 91% are betting they will be unchanged.

"A stock-market decline late last year has also helped gold, though this year's gold rally has taken place alongside a sharp bounce in the S&P 500, which is up more than 11%.

"'After the complacency of recent years, investors are realizing they may be overexposed on the equity side and want to build up a hedge,' said Maxwell Gold, director of investment strategy at Aberdeen Standard Investments.

"Investors aren't the only ones seeking out gold. Central banks bought the most gold by volume last year since 1967, according to the World Gold Council. Gold holdings at global central banks have increased by roughly 13%-or 3,900 tons-since 2009, according to TD Securities.

"China announced in December that it had increased its gold pile by nearly 10 tons in 2018, its first purchases in three years. Also buying last year: Russia, Turkey and Kazakhstan.

"Many emerging-market countries are looking to boost their gold reserves, which are comparatively small, said Bart Melek, head of commodities strategy at TD Securities… Mr. Melek expects central-bank gold holdings world-wide to grow by another 800 tons over the next two years.

"…Hakan Kaya, a portfolio manager at Neuberger Berman, increased his gold position in the final quarter of last year and expects a softer dollar, dovish Fed and growth worries to keep prices elevated.

"'A lot of people see a bad moon rising, and if you want to have a downside hedge, gold is the instrument,' he said." ("Wary Investors Reach for Gold," Ira Iosebashvili, The Wall Street Journal, 02/21/19.)

Gold Surges on Elevated Geopolitical Uncertainty - Ramkumar and Hodari

Geopolitical uncertainty continues being a catalyst for higher gold prices.

"Gold prices surged to their highest level in 10 months Tuesday, lifted by haven buying as investors monitored continuing trade talks and political uncertainty in Europe.

Gold for February delivery, the front-month futures contract, climbed 1.7% to $1,340.10 a troy ounce on the Comex division of the New York Mercantile Exchange. The metal posted its highest close since April 19 following its biggest one-day increase since Nov. 1 and has added 4.8% this year, supported by investors seeking safer assets and signs that central banks around the world will be cautious with interest rates moving forward.

Some investors buy gold when they anticipate turbulence in risk assets and slowing global growth, and the metal also becomes more attractive relative to yield-bearing assets like Treasurys when rate expectations moderate.

Although trade talks between the U.S. and China generated positive reactions from analysts last week, many remain cautious about the two sides reaching an agreement that could lift the outlook for the global economy and calm markets. Trade tensions and weak economic figures in Europe have buffeted stocks in recent months and lifted haven assets such as gold.

"Last week's talk apparently made some progress, but at some point investors would like to see more evidence of what exactly was agreed to," said Edward Meir, a consultant at broker-dealer INTL FCStone, in a note to clients.

Analysts were also monitoring the dollar, as a weaker U.S. currency makes commodities denominated in dollars cheaper for overseas buyers. On Tuesday, the WSJ Dollar Index, was down less than 0.3%.

Investors were looking ahead to minutes from the Federal Reserve's last meeting, scheduled for release Wednesday afternoon, for the latest clues on the central bank's plans for interest rates. ("Gold Surges on Elevated Geopolitical Uncertainty," Amrith Ramkumar and David Hodari, The Wall Street Journal, 02/19/19.)