Is Gold About To Embark On A Multi-Year Rally?Submitted by Reed Financial Group on March 8th, 2019
The price of gold is moving up – but should investors care?
The gold rally that started in the late summer of 2018 and has continued through the end of February 2019 is showing signs of slowing down, now that it appears that the US and China are making progress with respect to trade. And many financial advisors are happy to see the rally fizzle, as they never were fans in the first place, having counseled gold-loving clients to limit their holdings of the metal for years.
Here are simple reasons many shy away from gold:
• You can’t eat it;
• You can’t create energy with it; and
• It doesn’t have much of a commercial use.
Generally speaking, people buy gold as an insurance policy against extremes, either inflation of high single digits and higher, or Armageddon.
Further, investors often take a downbeat view of what are called “alternative assets” which includes gold. In fact, a survey of investors found that 48% of them considered such assets hard to understand because they were illiquid or volatile.
Since the summer of 2013, the price of an ounce of gold traded within a fairly tight range – with the spot price at $1,242.80 in June 2013, bottoming out in December 2015 at $1,060.00, peaking at 1,357.10 in July 2016 and currently trading close to the July 2016 peak.
But what has investors more interested is that the price has risen steadily since August of 2018, when it was priced close to $1,178.40 and is now close to 1,331.00 at the end of February 2019.
Why the Recent Rally?
While the price of gold has clearly nudged up in the past six months, the fear factor that largely drives the rally is starting to diminish.
Over the past several months, especially in early 2019, gold investors pointed to concerns over the US/China trade wars, Brexit, and fears of an economic collapse of Europe which increased their concern that ruinous inflation could follow. That did not occur.
While the major US stock markets paused toward the end of 2018, since that time it appears that the almost 10-year bull market might continue. Plus, President Trump announced plans on extending the March 1 trade deadline for increasing tariffs on Chinese goods.
Further, Inflation at the moment is muted. As of February 2019, the Consumer Price Index was unchanged for January and rose 1.6% over the previous 12 months, according to the Bureau of Labor Statistics.
Very often, the financial advisor community is not enamored by gold because, among other things, its aficionados have a kooky reputation and an alarmist outlook. Just think of the term used to describe those enamored with gold – they’re called gold bugs for goodness sakes.
And most financial advisors are just too optimistic and caution gold-bug investors not to worry that the world is coming to an end as they warn gold-bugs about falling into a negative feedback loop.
Another reason advisors doubt gold is a good long term investment is that it often behaves as a commodity and commodity prices are volatile (whether gold is a commodity or a currency or something else is a fascinating debate for another time). While the decade-plus run from 2000 to 2012 was impressive – with the price of gold increasing sixfold, the thinking is that gold prices are just too inconsistent. To some degree, history backs that up. Gold’s previous surge was in the inflation-ridden 1970s. Then it plunged and stayed low during the 1980s and 1990s. Then it surged again in the 2000s, dropped starting in 2012 and seems to be on the upswing.
A Gold Tale
Let’s say you bought gold coins in 1980 at $682 an ounce. In the year that followed, your investment fell by half. You still own them and have just about doubled your money over the last 39-plus years.
But in 1980, the Dow was hovering around 2,500. Sure, in the 2 years that followed, you would have watched your investment decline as the Dow was trading around 2,100 in June 1982. But today the Dow sits around 25,000. In other words, the money you spent for gold would have expanded 10-fold if it had been in the stock market.
So, how do financial advisors deal with clients who are hot to own the metal? Politely