EDITOR NOTE: In years when the dollar declined (over a 50-year history), gold’s return averaged around 18%. That just refers to the price of the dollar index. What it doesn’t show is the decline in the dollar’s purchasing power, which is much more steep and drastic. And to that, gold holds an absolute advantage, not just as investment, but as “money” itself. When central banks across the globe needed safety reserves, they used to purchase dollars. Now with the dollar’s status in question, central banks are filling up their reserves with gold. That in itself should say everything about the yellow metal. One fund sees gold rising to $3,400 per ounce--good news for gold investors, as the metal still has lots of room for price appreciation.
Gold could soon regain its shine, according to one ETF issuer.
The precious metal is nearly 5.5% from its Aug. 6 all-time high, trading around the $1,939-per-ounce level as of Wednesday. Gold prices declined more than 6% in Tuesday’s trading session, their worst single-day drop in seven years.
His target for the metal is $3,400 an ounce, based on the idea that deflationary market environments with similar levels of government stimulus and systemic risk have been bullish for gold in the past, he and VanEck portfolio manager Joe Foster wrote in an Aug. 4 note.
“We became really bullish last summer when gold broke out of its six-year sort of sideways market, and then the other technical confirmation happened when it went to all-time highs a month or so ago,” van Eck said Monday on CNBC’s “ETF Edge.”
“I’m oversimplifying here, but gold competes against interest rates,” said van Eck, whose firm runs several gold-based exchange-traded funds including the popular VanEck Vectors Gold Miners ETF (GDX).
“If interest rates are high, gold, which pays basically no interest rate, becomes less attractive. As interest rates vector towards zero, which they are now, then gold’s relative appeal grows. It’s really that straightforward,” he said.”
With gold “clearly in a bull market,” negative real interest rates should only help that along, minor corrections notwithstanding, the CEO said.
“The gold bull market will end when rates start going higher,” he said. “Now, the Fed said ‘we’re not thinking about thinking about raising rates,’ so, we think it’s going to be a longer cycle. But that’s the risk to the trade.”
Tom Lydon, CEO of ETF Trends and ETF Database, flagged a few other catalysts that could drive gold higher.
While he didn’t necessarily agree this was a deflationary environment, stagflation — which can be brought on by elevated unemployment, slowing economic growth, low interest rates and “the potential for inflation creeping in” — also tends to be supportive for gold, Lydon said.
“There are other stagflationary periods over time where gold has done really, really well,” he said in the same “ETF Edge” interview.
Gold has also been benefiting from overseas demand, Lydon said.
“It’s not just central banks. It’s not just individual investors like us. Jewelry demand continues to be strong in emerging market countries,” he said. “That’s also supporting the price, and ultimately, it’s getting more and more expensive to get an ounce of gold out of the ground.”
Ritholtz Wealth Management’s Ben Carlson said another major index can serve as an indicator for the metal.
“If the dollar continues to fall, it could juice gold,” Carlson, his firm’s director of institutional asset management and the author of “A Wealth of Common Sense,” said in the same “ETF Edge” interview.
Carlson’s research showed that in the last 50 years, the dollar rose on an annual basis roughly half the time. In years when the U.S. currency climbed, gold’s average annual return was about a 1% loss. In years when it fell, gold’s return was around 18%.
“So ... you check real interest rates and inflation and all these things, but gold is actually a really good hedge against the falling U.S. dollar,” Carlson said. “So, if the dollar continues to fall, that’s probably not bad for gold.”
Originally posted on CNBC