Has Gold Started A New Bull Market? The Experts Share Astonishing Insights
- Spot gold prices surged 7% over the past three months. Stocks of large gold miners rocketed a stunning 17% over the same period.
- SPDR Gold Trust ETF (GLD) has yet to fulfill the classic definition of a new bull market. It has not rallied 20% from a bear market trough over six months.
- The much more volatile Market Vectors Junior Gold Miners ETF (GDXJ) has technically started a new bull market, rallying 20% from its July low.
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Gold bullion and gold miners' stock prices have regained their shine after a multi-year meltdown. Spot gold prices surged 7% over the past three months. Stocks of large gold miners rocketed a stunning 17% over the same period. But gold and gold miners remain down 5.4% and 19%, respectively, over the trailing year.
Gold has been inching lower since 2011, when it topped at $1884 an ounce. Gold closed 38% below that historic high Friday at $1,164 an ounce. Just on the basis of mean reversion, gold should regain its luster to return to its long-term average price.
What the Gold Charts Are Saying
The chart for gold -- as tracked by the SPDR Gold Trust ETF (NYSEARCA:GLD) -- appears bullish. Since its July-August trough it has been trending higher, hitting higher highs and higher lows. SPDR Gold Trust ETF managed to break above its short-term 50-day moving average. But it's hitting resistance at is long-term 200-day moving average.
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But SPDR Gold Trust ETF has yet to fulfill the classic definition of a new bull market. It has not rallied 20% from a bear market trough over six months or more. It has gained only 7% from a five-year trough. The gold miners, however, look more promising. Market Vectors Gold Miners ETF (NYSEARCA:GDX) ETF spiked 17% from its July-August low. The much more volatile Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) has technically started a new bull market, rallying 20% from its July low.
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So how can investors tell whether this is just a counter-trend rally in a multi-year downtrend or the beginning of a new bull market? I asked a panel of investing strategists and financial advisors this and several other questions about gold: Has gold bottomed after falling 40% from its 2011 peak?
What would signal that gold has finally bottomed? What would drive gold prices higher at this point?
What would drive it lower? Should people buy it now? Why? Or should investors stay away altogether? Here's what they had to share.
The Bears
Jason Pride, director of investment strategy at Glenmede, Philadelphia with more than $30 billion under management: At near $1200 an ounce, we view gold as being in the range of fair value. Our estimates of fair value range from $900 per ounce to $1250 per ounce based on the perspective of the buyer. The range is created by three separate perspectives 1) look at gold prices relative to historical rates of inflation, 2) gold prices relative to broad commodity basket and 3) gold prices relative to the value of the global monetary stock. That gives us three data points, which create the range.
Someone looking to protect against inflation would look at prices relative to the consumer price index (NYSEARCA:CPI), whereas someone who sees gold as an alternative to other commodities would value it relative to a basket of commodities. This is hardly a low valuation, but may entice some buyers.
Gold is very much driven by monetary policy and an expectation of monetary policy. An expectation of even stronger monetary policy would drive it higher. Base case is that monetary policy is getting softer on the margin and that's probably the reason that gold will continue to face a headwind. One way of thinking of gold is as an alternative to fiat currencies. Looked at it this way, we would submit that its value may be supported or pressured by ongoing monetary stimulus (an increase in supply of an alternative store of value) or lack thereof.
Gold has not reached that low of a valuation, and, in fact, is at the high range of the fair value range we estimate. We are advocating a more broad commodity exposure for investors who want an inflation hedge, but see little reason to carry a heavy exposure to protect against inflation at this time.
Robert R. Johnson, PhD, CFA, CAIA, President and CEO of The American College of Financial Services in Bryn Mawr, Penn.: Many investors want to tout gold as a good hedge against inflation, claiming that during times of rising prices, gold performs well. The empirical evidence simply doesn't bear this out.
In Invest With the Fed, my co-authors, Gerald Jensen of Creighton University and Luis Garcia-Feijoo of Florida Atlantic University and I looked at how several asset classes performed during rising and falling interest rate environments. From the mid-1970s through 2013, when interest rates were rising and inflation was higher, gold returned 4.9%. When rates were falling and inflation was lower, gold returned 7.8%.
With interest rates at historic lows and seemingly everyone anticipating that rates will rise, I believe that investors should not look to allocate funds to gold. In fact, I don't believe that gold should be a core holding in investor portfolios. If investors are looking outside of stocks and bonds during rising rate environments they might consider a diversified basket of commodities.
During that same time period, the Goldman Sachs Commodity Index (Pending:GSCI) returned a robust 17.7% when rates were rising. There are ETFs available that track the GSCI Index.
Michael J Driscoll, clinical professor of finance at Adelphi University in Garden City, N.Y.: At $1177 an ounce down gold to me does still not offer the protection from inflationary pressures that many investors and "gold bugs" seem to be hoping for. First, there are not really any significant indications that there are any inflationary pressures really present in the U.S. or global economies right now.
The real catalyst for the current gold mania began a few years ago when there were fears that the quantitative easing programs that began around the globe in response to the financial crisis which began in 2008 was going to precipitate a growth in money supply that would cause inflation. These fears were unfounded and most central banks around the world would welcome some inflation of say around 2% or so. In some economies, such as Japan, fears of deflation are still more of a concern.
Gold has traded in a range of $1310-1073 for the past year. The "barbarous relic" will always hold some fascination for investors calling for the end of the global financial system and fears of the "world bank" or the United Nations taking over the world. Unlike most other commodities such as crude oil or foodstuffs, which get consumed, almost all of the gold which has ever been mined in the history of the world still exists in the vaults of central banks around the world.
It represents a "cost" in investing parlance as it pays no dividend and has to be stored, insured, and protected from theft. Ironically many of the investors who purchase gold as a hedge against financial Armageddon hold the metal in the form of futures contracts or even exchange-traded funds. In the event of a real market disruption, the financial markets might not work the way these investors would expect them to.
Troy VandenBosch, WMS, associate vice president of investments, VandenBosch Capital management of Raymond James in Farmington Hills, Mich.: As someone who has invested in gold (the ETF, not physical bars) for myself and my clients, I've learned that the commodity is simply too difficult to value. Because it pays no dividend nor earnings. I believe it simply trades on technical levels, and more importantly, fear.
A big part of gold's parabolic rise from 2009 to 2011 (note, it still went down with everything else from the market peak of 2007) had everything to do with the fact that it was seen as a "safe haven" because the world was so downright scary during that time. Accordingly, and since the world happily did not end, gold has fallen dramatically. Not really a "safe haven" as it's so often pitched in newsletters and infomercials. And that is truly the unfortunate part that the investment public does not understand.
Every investment comes with risk and the way it is pitched to investors is a travesty. There will always be the gold believers (aka "bugs') who continue to push gold because of everything that's wrong in the world and to them, the sky is usually falling. I however, am quite bullish on the economy and the markets, and currently don't think gold has a place in investors' portfolios right now.
But, because as I stated above that it also trades on technical levels, with its recent breakout above its 200-day moving average (a very popular metric used by technical analysts) it's now popped up on a lot of people's radar.
The Bulls
Chris Gaffney, president, EverBank World Markets: It is always difficult to call a bottom in any market. but I'll go out on a limb and say the $1,085 price of gold on 8/5/2015 will be the low.
Physical demand for the precious metals continues to be high, especially from buyers in China and India where incomes continue to rise. This should keep a floor on the gold price. But I'm not suggesting we are going to see a big spike in prices either. In spite of indications to the contrary coming out of our Federal Open Market Committee, I believe global interest rates are going to remain low for a long time.
The European Central Bank and Bank of Japan look to continue their quantitative easing programs, and may actually increase the amount of liquidity they are pumping into the markets. These programs are designed to try and 'generate' inflation and growth, but as is apparent from a quick look at inflation rates these attempts have thus far been unsuccessful.
Without any signs of inflation I think gold will struggle to find a consistent bid.
A delay in the expected interest rate increase by the U.S. Federal Reserve could push gold prices higher. A return of growth in China, and / or higher inflation would also give gold prices a boost.
Finally, gold is still viewed as a 'safe haven' so a black swan event, geopolitical tensions, financial crisis, and our a big pull back in the equity markets should lead to more demand for precious metals and therefore higher prices.
What would drive it lower? If the FOMC makes a 'surprise' increase in rates at their meeting next week, or make a strong case for normalizing rates in December that will keep a lid on gold.
A 'hard landing' in China or further slowdown in India would also lead toward lower prices for gold as these are two of the largest markets for the physical metals.
From a technical perspective, gold has retraced 50% of its 10-year bull market from 2001 to 2011, which usually indicates a major support level. Gold has also broken above its 200-day moving average again this month for the first time since May. These signs point to bullish price action going forward.
David Twibell, president of Custom Portfolio Group LLC in Denver with $100 million under management: Gold is a unique investment. Unlike stocks, gold has no earnings, pays no dividends, and provides no objective way to measure its value. Instead, its price is almost entirely determined by investors' perceptions of inflation, currency movements, or other extraneous data.
The recent run-up in gold hasn't occurred because people spontaneously decided to buy more gold jewelry. It was spurred by the perception that the U.S. dollar would fall in value after the Fed again failed to raise interest rates in September. This makes it nearly impossible to call a definitive bottom in gold prices - as legions of analysts have found out much to their chagrin over the past few years - because if one thing is perpetually true in markets, it's that perceptions change faster than the weather.
All of which leads me to a couple of fairly basic conclusions: (1) most investors should own a small (5%) core position in gold as a hedge against bad things like rampant inflation, global turmoil, or a U.S. dollar collapse, and (2) they should add to this position when prices decline substantially and everyone believes gold is no longer worth owning because none of these bad things is likely to occur.
Until recently, that's exactly where we were. Gold prices had fallen dramatically over the past few years and it was nearly impossible to find anyone outside the perpetually-bullish gold bugs who wanted to own the stuff. To me that was a signal investors should add to their gold holdings.
Gold will go higher from here if investors believe the U.S. dollar will continue to fall, inflation will accelerate dramatically, or the world is on the precipice of a crisis. None of these actually has to occur. The perception they will is enough. Since we're coming from an extended period where these things seemed all but impossible, my guess is perceptions will swing the other way for a while. If so, investors who snatched up some gold at current prices will be amply rewarded.
Josh Crumb, co-founder of BitGold in Toronto, Canada: Gold is probably closer to a cyclical bottom than most think and with greater asymmetric upside from surprises than down. But there is still too much volatility in the economic data for anyone to say for sure.
Gold has already bottomed against most currencies outside of the U.S. dollar. So it is only a matter of time before we find the U.S. dollar-gold low to this cycle as well. That all said, the Federal Reserve can still guide the markets back toward a rate hike cycle starting in December if economic data justifies it, which would be short-term bullish for the U.S. dollar relative to gold.
What would signal that gold has finally bottomed? Stable forward energy prices are the most important factor to watch for gold, and not enough people pay attention to this trend in our opinion.
The Fed and nominal rates are only one-third of the equation, as gold is driven by real rates and its marginal cost of production, both heavily influenced by energy prices.
From this standpoint currency, inflation volatility, and relative U.S. economic strength is predominately driven by the changing global energy landscape more than anything else, so all Fed action is really only a short-term driver.
What would drive gold prices higher at this point? Gold has always been driven by real rate expectations and forward energy prices, so any change in the outlook for energy or real rates will change the cycle for gold. The market currently expects low inflation combined with normalizing rates at some point over the next six-12 months, therefore, higher real rates.
However, this near unanimous view was shocked by the happenings in China, and real rate expectations changed from "when" the Fed normalizes to "if" the Fed can normalize. Any further move in that direction and gold will go up. Gold will also go up when there is a clear sign that the oil industry has reached a breaking point and forward prices can trend up again.
What would drive it lower? In our view the two downsides for gold are that 1) shale oil producers continue to spend capex and grow under lower and lower forward prices, we will learn more about that in the coming quarterly reports of producers, and 2) economic data surprise to the upside over the next three or four weeks and the Fed guides the market back to
a rate hike cycle starting in December.
Should people buy it now? Gold should always be accumulated over time as a savings base of a portfolio, not as a speculative investment to be timed. We do not recommend anyone try to time gold. The value risks and exogenous-uncertainties always lie in the value of the currency, or the price denominator, not the store of value characteristics of gold, which have never failed over time.
The Indifferent
James Steel, HSBC's chief commodities analyst with specific responsibilities for precious metals: We do not give direct recommendations and this really depends on the requirements of individual investors. But gold has a reputation of being a good portfolio diversifier as it tends to move in the opposite direction of paper markets, most of the time. However, there is no guarantee this will always be the case.
It is important to understand that the physical market has shifted to Asia. China and India together account for roughly two-thirds of all the physical gold bought in the world, mostly in jewelry form. The underlying physical market may be governed by different motives from the investment markets.
In the West, the jewelry and coin market is distinct from the investment market. In the East, the two tend to be a bit blurred. This makes for interesting regional distinctions in the bullion market.
The market has dropped considerably since the peak. We see a firm bottom of around $1,000 an ounce. Below $1,100 an ounce, price sensitive emerging market physical demand emerges in greater strength and the recycling market, which is the largest source of gold after mine output, is curbed.
Historically, previous drops below this level have stimulated fresh physical demand, which acted as a floor.
A gold rally can come from any number of quarters, but traditionally the most potent driver of gold prices is U.S. dollar strength. Gold has an inverse relationship with the U.S. dollar. This is logical as gold is considered the world's supreme hard asset and the U.S. dollar the world's supreme paper asset.
A weaker U.S. dollar therefore would have a bullish impact on gold.
Also a marked rise in financial market or economic uncertainty, which weakens paper markets could boost gold. Stronger commodity prices or renewed concerns over inflation could also buoy gold.
Some of these factors may be likely to occur and others unlikely. Generally speaking the gold price is a balance of conflicting or offsetting bullish and bearish factors with one group edging out the other in influence.
What would drive gold lower? Broadly speaking the converse of what would take it higher.
This includes a strong U.S. dollar, high real interest rates, steady low-inflationary growth, strong paper markets and a high level of investor certainty as well as low world commodity prices, would be expected to weigh on gold prices. Some of these factors are apparent currently.
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