Gold may have risen around 12% since August, but there are plenty of fundamental reasons to believe that the rally is still far from over.
Every investor hopes to get in on the bottom floor. But it’s a difficult thing to do as investors often move in groups (hence, they miss out), or they wait for clear signals which don’t always present themselves.
Gold is different. Its rise from the bottom floor has been slow and steady, and the economic and geopolitical factors supporting its rise are evident.
Here are six factors supporting the case to buy gold, and to buy gold now.
ONE - Bond Yields Are Declining
US Treasury yields have seen a sharp fall. Contrary to the Fed’s earlier rhetoric, the Fed has grown more sensitive to market response. In light of economic weakness in the US, the Fed has taken a more dovish stance. And with high bond yields now gone, the opportunity cost to own gold has significantly decreased.
TWO - The Dollar is Weakening
When US bond yields decline, so too does the US dollar. Investors around the globe will simply seek growth or yields elsewhere and through other assets. Gold trades inversely to the dollar. If the dollar trades off real interest rates, and if gold trades off the dollar, then the weakening of the dollar typically signals a rise in gold prices.
THREE - Central Banks Are Loading Up On Gold
We all carry a debt burden. Some of us have more debt than others. But all of our personal debt pales in comparison to global debt, which has reached upwards of $244 Trillion. Here’s a better way to visualize it: imagine a debt that is 3x the size of the entire global economy (according to the Institute of International Finance). Now you get the picture.
Amid these risks and uncertainties, central banks need sound and reliable assets--assets with neither counterparty nor debt. And that’s why during the last quarter, central bank gold purchases have risen by 130%, according to the World Gold Council. In 2018, gold buying came in at 650 tons. This is the highest level of gold buying since President Richard Nixon was elected in 1968. Furthermore, the World Gold Council has reasons to believe that the central bank gold buying isn’t over yet.
FOUR - Fear Encourages Investors to Seek Safe Havens
As central banks hold gold as a “safe reserve,” so too do most economically-minded investors around the world. Gold preserves capital. Gold preserves purchasing power. Gold preserves value when all other asset values go down. Inflation risk can be mitigated with gold. Recession risk can be mitigated with gold. And geopolitical tensions can also be mitigated with gold. The growing demand for gold will intensify, further driving gold prices upward. As the US economy is in the late stages cycle of its current cycle, the demand for gold will likely see no decrease in the near future.
FIVE - US-China Trade Deal
This factor attests to gold’s adaptability to varying economic conditions. While gold is a good hedge against the uncertainties caused by the current trade war, gold also benefits from the resolution of the trade war. Should trade tensions be resolved, China’s economic outlook would strengthen. This, in turn, would boost the price of commodities--including gold--considering that China consumes around half of the world’s commodity output. Besides, China has been increasing both its gold production and imports, a factor to consider regardless of the outcome between the US-China trade talks. Hence, gold’s likely to rise either way.
SIX - Gold is in Short Supply
Massive investment in gold mining last took place in 2011, when gold prices peaked. Gold mining production has come down since then. Decreased production means decreased supply. And with the current increase in demand, there may not be enough gold to keep prices low over the next three to five years.
On a technical level, gold has resistance at the $1,350 price range. Above this range, gold would technically enter the bullish territory, suggesting that it can continue moving higher and that it has yet a lot of room to grow.
But as long-term investors, most of us base our buying decisions on fundamentals. We see the results stemming from the factors we’ve just covered. Central banks are buying. US bond yields are falling. The dollar is weakening. Geopolitical factors, regardless of the outcome, are likely to boost demand for the yellow metal in short supply.
What other factors might be missing?
Gold is on the rise. The question now is whether you will benefit from gold’s uptrend or whether you will miss the boat.
Remember, unlike central banks around the globe, you don’t have to load up on gold. A mere 5% to 10% portfolio allocation may be all you need.
But if you are the type of investor looking to buy sound investments as close to ground level as possible, well, here is your chance to buy gold now.