Gold Is One Of The Strongest Asset Classes of the 21st Century!
Since the early 2000’s, gold has been one of the strongest asset classes of this century. Gold’s remarkable performance has helped the yellow metal continue to dominate international headlines and capture the world’s attention. This article will offer an overview of the 7 primary reasons why the world is bullish of gold.
1.) Weak Dollar
Since the late 1990’s, the US dollar has steadily depreciated against many of its peers. In the process, dollar denominated assets (mainly stocks & commodities) have increased in value. For the vast majority of the 20th century, the U.S. dollar was a symbol of “strength” and due to its recent decline, the greenback has lost some of its luster. That important point coupled with the enormous debt incurred by the U.S. government, investors are looking for other areas of “strength.” One logical beneficiary, gold.
Inflation occurs when asset prices increase in value. It is important to note that a small dose of inflation is considered “healthy” for normal economic growth. However, there is a very fine line between, “healthy” inflation and “unhealthy” inflation. Many people flock to gold to protect their portfolios from the deleterious effects of inflation. At this juncture, many investors believe that higher inflation will occur as the global economy recovers.
In its most basic form, reflation is the act of stimulating an economy by “reflating prices.” This is usually accomplished by increasing the money supply or by reducing taxes. Another way of explaining reflation is that prices will “reflate” back to prior levels. If reflation takes over across the board as it did in 2003-2007 then expect gold to rally in that kind of an environment.
Deflation occurs when asset prices decline in value. The most recent example was the brutal worldwide bear market of 2007-2009. Even during that ominous period, gold was one of the only asset classes which did not implode. Crude oil tanked nearly -80% from $147 to $33 a barrel. The Dow plunged -54.43% from its Oct 2007 high to its March 2009 low. Meanwhile, gold “only” fell -34% from its March 17, 2008 high of $1,032 to its bear market low of $682 in Oct 2008. Since then, gold is the only asset class that has recovered its entire decline and has surged to new all time highs! This healthy action (outperforming on the way down and up) illustrates how strong gold actually is.
5.) Strong Technicals
Many people invest by using technical analysis or fundamental analysis (we use both and see no reason why anyone would consciously avoid using a helpful tool- but that will be a separate post) and in both cases, gold wins. Gold’s chart (technical analysis) is very strong as it continues surging to new highs in an orderly fashion. The bulls remain in control as long as gold continues trading above $1,000.
6.) Strong Fundamentals
Gold sports bullish fundamentals (demand currently trumps supply) which has played a pivotal role in the recent rally. Investors like to invest in commodities that have favorable fundamentals for obvious reasons and right now, thanks to the robust demand for the yellow metal, gold’s fundamentals remain stellar. Honestly, what else could one ask for?
7.) Global Economic Crisis
Historically, gold has flourished during periods of duress. People love the idea of owning something tangible and gold is the perfect solution. Gold offers a perceived safety of actually being able to own something that is inherently valuable. Thus, the world’s insatiable appetite for gold throughout the centuries!
8.) Cheap Money (a.k.a leverage)
Who is responsible for driving gold higher? Aunt Mary and Uncle Bob? You? Your neighbor?Your local financial advisor? Doubtful. There are two driving forces that determine prices for nearly all capital markets: large financial institutions and governments. Thanks to the coordinated global stimulus packages that came into effect in 2008, central banks have lowered interest rates to historic lows. This makes money very “cheap” for large institutions to borrow and invest in capital markets. What’s one of their favorite areas to “invest”? You guessed it, gold!
9.) Central Banks Are Buying
Marty Zweig, a famous trader and author of Winning on Wall Street, is famous for coining the phrase, “Don’t fight the Fed.” He advised investors to align themselves with the Federal Reserve, not against it. Right now, central banks around the world are aggressively buying gold and Zweig’s advice is still valid. As long as Asian central banks are buying then their will be a very strong bid in this market.
10.) Gold is in a Bull Market
Gold is currently in a massive bull market and that is the most important reason why people love gold at this point. Gold is also under-owned in a historical context. During prior recessions (and/or bear markets) and the Great Depression in the early 1930s, gold accounted for massive amounts of investable wealth. Most records indicate that approximately one-fifth of investable assets were in gold. However, in the third quarter of 2009, even using the most generous estimates, less than 5% of investable wealth worldwide is in gold. This data shows that gold is still under-owned by both individual and institutional investors. Again, gold wins.
Summary: Trust The Market
Perhaps the most important lesson is to trust the market. Since the turn of the century, we have been bullish on gold and have advised our clients and anyone else who would listen (in speeches or in the media- latest Reuters quote here) our thoughts on gold. In the interest of full disclosure, we are currently long and sitting on very healthy gains in this market (become a client today!). In our humble opinion, we believe that gold is in the nascent stages of another leg higher but is currently extended and is likely due for a short term pullback to shake out the late participants. Furthermore, we are fully cognizant of the fact that one day this bull market will end (just like every other bull market in history) and at that point we will be fully aware and ready to sell our position and lock in our gains. Until then, we are long and comfortable!
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