The price of gold has cooled down somewhat after the recent upswing. But there are reasons why it is still worthwhile for investors to own gold.
According to MarketWatch columnist Michael Brush, there are five catalysts that keep the price of the precious metal high.
Despite the fact that the fear of recession has decreased in the short term, in the medium term there are still many good reasons to own gold, the shares of gold miners or gold ETFs. The five most important are:
1. Gold offers protection
It can just happen that people talk the economy into recession. It wouldn’t be the first time that fear of recession caused one. James Paulsen, head strategist at Leuthold Group, sees a 25% chance that we are talking ourselves into recession. “The risk exists, but I don’t think it’s the most likely outcome,” gouden munten said.
According to Deutsche Bank gold analyst Chris Terry, gold also offers investors a safe haven when it comes to political risks and the uncertainties arising from the brexit and trade dispute between the US and China.
2. Central banks go for gold again
Central banks are buying up gold in volumes we haven’t seen in 50 years, said Tom Winmill, manager of the Midas Fund. Because of the strong dollar, central banks are diversifying “away from the dollar” according to him. The biggest buyers of gold are Russia, China and Poland.
3. US needs inflation to reduce debt
The U.S. now borrows almost a trillion dollars a year. Approximately 22% of the federal budget is financed by debt. The US debt-to-GDP ratio could reach almost 100% in the next decade, compared to about 78% now.
Usually, governments resort to inflation to reduce debt, Winmill said, and he thinks the U.S. is now taking that rate. Gold usually performs well when inflation rises and the dollar weakens.
Even if that doesn’t happen right away, the tight labor market can cause inflation through wage growth. “It wouldn’t surprise me to see a gold price of $2,000 an ounce in two years,” says Winmill.
4. Gold has momentum
Capital flow to gold funds skyrocketed significantly in August and September, said Ralph Aldis, portfolio manager at U.S. Global Investors. Based on what these capital flows have suggested about investor sentiment in the past, he said this could indicate continued interest in gold in the future.
Aldis manages the US Global Investors Gold and Precious Metals Fund and the U.S. Global Investors World Precious Minerals Fund. The interest in gold is logical according to him, because a recession next year is possible. He also doubts whether Trump really wants to solve the trade dispute with China, because Trump’s goal is to rebuild the U.S. manufacturing sector.
5. There may be shortages
At the Denver Gold Forum in September, Barrick Gold warned that the amount of gold mined could fall by 45% over the next ten years if investment in new mines does not pick up. Many mining companies have reduced investments over the past six years due to the weak gold price.
Winmill prefers mining companies with large reserves and considerable free cash flow. He thinks that the shares of many such companies, despite the rising gold price, are still cheap. He chooses Alacer Gold, Pretium Resources, Roxgold and B2Gold. The favourite large companies in his Midas Fund are Barrick Gold and Agnico Eagle Mines.
Ralph Aldis from U.S. Global Investors has chosen Wheaton Precious Metals and Wesdome Gold Mines. He believes that smaller mining companies are takeover candidates for the larger peers who want to build up their reserves.
No recession? Falling gold price
In the short term, the next step in gold mainly depends on what happens to the economy. “If the economic reports reassure people that a recession will not happen for a while, gold will not be a great investment”, according to Leutholdstrateeg Paulsen.
He expects that we won’t have a recession in the short term, and that the price of gold will therefore remain flat or even fall. He gives three reasons for this:
1. Strong economy needed
President Trump needs a strong economy in order to be re-elected. He has a great deal of influence on business and consumer confidence. Trump’s deposing procedure will not hurt sentiment as Democrats are 20 votes short in the Senate for the two-thirds majority they need to remove him from office.
2. Signal doesn’t add up
the reverse interest rate curve signal about an approaching recession is not correct this time. It does not tell us that a recession is imminent. A reverse interest rate curve occurs when the long-term interest rate is below the short-term interest rate