Gold regains its mojo

In inflationary environments, investors historically have hedged their bets by buying gold. However, this time around, the precious metal has languished as investors bought alternative investments. But times are changing.

The primary alternative to buying gold has been cryptocurrencies. Bitcoin and Ethereum, two of my 2021 buy recommendations (for those with a strong stomach) have enjoyed spectacular gains in 2021. Bitcoin, at one point in May, had gained almost 100%, while Ethereum saw gains of more than 400%.

In addition, other commodities held more interest than gold for most investors. In January 2021, I recommended investors focus on some specific commodities, especially oil, copper, and soft commodities, like food and lumber. I listed gold as my last pick among those commodities.

That proved to be the correct approach because I recognized that the world had moved on, at least temporarily, from something as arcane as gold. In today’s internet world among the Robin Hood traders and GameStop crowd, gold was simply not as attractive as digital currencies. There are plenty of arguments for why that could be the case. Bullion, for example, is expensive to hold, and rising interest rates increases the cost of holding it.  Gold is cumbersome, while digital transactions are easy and far more efficient. And while gold is still used in several products, copper, lumber, and oil are far more leveraged to a re-opening global economy.

It is not as if gold has gone nowhere. Gold made what I consider a cycle low back in November 2020 at $1,767.20/ounce. Today, that same ounce of gold will fetch $1,882.70. That’s roughly a 6.5% gain. That’s much better than the risk-free rate in the bond market, but compared to the stock market’s 12% gains it has been disappointing at best.

However, recently gold has begun to perk up and I believe we may be on the cusp of a new move higher in this precious metal (and silver along with it). Why the change in attitude? The increased worry over how high and how fast inflation will rise and the dollar’s sharp decline has investors nervous.  At the same time, other commodities are at record peak prices, while gold has done little.

In addition, recent arguments that crypto currencies are the Twenty-First Century’ “new gold” is beginning to unravel as speculation within that asset class runs amuck.

As an example, the crypto world is in the midst of a massive decline (even as I write this). Bitcoin has fallen from a high of $64,000 to Wednesday’s low of $33,700, which is almost a 50% decline. Ethereum and Dogecoin have also incurred similar losses.  The argument that it is a hedge against inflation or rising interest rates seems to be suspect given recent events.

I have noticed over the last few months an increasing number of Wall Street firms, including Goldman Sachs and Credit Suisse, have warmed to the prospects of gold. Some respected analyst forecasts are expecting gold to move much higher. Twelve out of 32 analysts are predicting that gold will average $2,000/ounce this year. The median forecast with half above and half below, averages $1,965/ounce.

I expect that all these forecasts could be low. I am putting gold at the top of my commodity list for the second half of 2021. Silver could be a close second. For investors interested in this area, keep in mind that gold and silver mining stocks usually outperform the metals by a ratio of 2-3 to one. Remember, however, that commodities overall, and precious metals in particular, are highly aggressive investments.

Any mention of specific securities or investments is for illustrative purposes only.  Adviser’s clients may or may not hold the securities discussed in their portfolios.  Adviser makes no representations that any of the securities discussed have been or will be profitable.