$1,339.50—that’s the price of gold today, and as you can see by the chart below, it’s had a nice ride since the beginning of the year.
You can thank global uncertainty—fears of rising terrorism, interest rates, and Brexit, as well as oil prices that stayed in the trenches until just recently—for causing the price of the metal to surge. Fear and uncertainty are the key drivers of bullish gold sentiment. Now, gold bugs all over the world are cheering again, after seeing gold fall precipitously after the recession and global sovereign debt crises drove it up from $750 to $1,950 from 2008-2011—only to see it dive some 35% as economies and markets began their recovery.
With the Stock Markets on a Tear, what does that mean for Gold?
The following chart shows the relationship between gold prices and the PHLX Gold/Silver Sector Index.
S&P 500 vs. XAU Gold/Silver Index
While it’s proven that there is an inverse relationship with gold and the dollar, that’s not necessarily the case with gold and stocks. Generally, when demand for the U.S. dollar declines, investors flock to gold, as you can see from this chart:
But not so with gold vs. stocks. According to Market Realist, the correlation between the SPDR Gold Shares ETF (GLD) with the S&P 500—since 2005—is 0.14. Correlations range from 1.0 to -1.0. A correlation of 1.0 means that two securities move in step, and -1.0 means basically, that when one goes up, the other goes down. No correlation is stated as 0.0. A correlation of 0.14 is essentially no correlation at all, and you can see that from the Gold vs. the S&P graph above.
And as for gold stocks, they usually follow the pattern of gold prices—not the general equity market.
Right now, all indications are that the equities markets are going to continue in a bullish trend for the near future. As Michael Cintolo, Chief Investment Analyst for Cabot Growth Investor said after the Federal Reserve decided to keep interest rates unchanged yesterday, “All of our key market timing measures remain bullish. The market’s intermediate- (Cabot Tides) and longer-term (Cabot Trend Lines) trends are positive, and the broad market is acting great, with our Two-Second Indicator having now recorded 14 straight trading days of single-digit new lows—a sign of robust health.”
So, where does Gold Go?
Stable interest rates provide a nice environment for gold, as there is less competition from higher-yielding investments. And many of our contributors see an ongoing bullish case for gold.
As Jack Adamo, Editor of Insiders Plus, recently noted, we’ve seen some heavy-hitter hedge fund managers like Stanley Druckmiller, David Einhorn, and Paul Singer, packing their grocery carts with gold. Jack went on to say, “The one scary element in gold investing at the moment is that JPMorgan Chase is now touting it. Chase has been widely seen as the biggest manipulator of the precious metals markets for many years. Like Goldman-Sachs, if Morgan says buy, I’m inclined to sell, and vice versa. However, the scuttlebutt in the pages of the radical financial sources, like Zero Hedge, has been that JPM manipulated the paper price of gold (futures, etc.) while it bought the actual metal. Maybe the bank feels it’s time to drive it to the next stage by getting the ETFs to go all-in again.
“So, I’m looking to buy more gold on any weakness or signs of a further breakout. I expect the latter soon, due to seasonal factors, so I may recommend adding positions at any time.”
Stephen Todd, of Todd Market Forecast, just changed his stance on gold to bullish as of July 27, based on the dropping dollar.
And in his July Value View Gold Report, Ned Schmidt said his Short-term Gold oscillator gave him a second buy signal in a week. Ned commented, “Not since 2007 has Gold been so cheap. The probability of Gold going higher, especially relative to equities, is sufficiently high to now support the price of Gold.”
Ned continued, “What all that is saying is that Gold has rallied substantially off the low. Gold is up ~$300 from the bottom. While the longer term bull market remains dominant, all market moves have corrections. We cannot tell you that it will happen now, or at $1,400, or at $1,500. Our “gut feel” is that it is more likely to happen from a value above $1,400. What this all means is that Gold investors should prepare themselves mentally for the reality that no market move is straight up or straight down.”
Gold Stocks or ETFs?
Since gold is so volatile—and should be primarily used for portfolio diversification—most investors should keep gold investments to no more than 10% of their portfolios, says portfolio manager for USAA Precious Metals and Minerals fund Dan Denbow.
There are more than 200 gold stocks listed around the world (see http://www.miningfeeds.com/gold-mining-report-all-countries), and we do include recommendations for some of the larger companies in our Wall Street’s Best newsletters. In fact, two of them—Freeport McMoRan (FCX), recommended by Sean Christian of The Personal Capitalist and Royal Gold (RGLD), chosen by Adrian Day of Adrian Day’s Global Analyst, have been our Best Performing Top Picks of 2016 so far, with gains of 231.06% and 199.96%, respectively.
But many investors seek greater diversification, so they often opt for gold exchange-traded funds. According to http://www.etf.com/channels/gold-etfs, there are currently 31 gold ETFs, with the top six holding more than $60 billion in net assets. They are:
As you can see, each of these ETFs is in the ‘Strong Buy’ or ‘Buy’ range, indicating a strong bullish trend.
So, if you are in the market for a little glitter, this may be the time to try some gold in your portfolio.
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks