Message from Jon
Why Gold...Now that 2020 is almost over?
Many of you might be asking yourselves why we are continuing to hold gold in many of our portfolios. Especially now that 2020 is nearly over and the fear index is hovering near 20.
We have no real fear in the short term about inflation either, so at this point, is there even a real advantage to our gold position at all?
Here is our opinion on the Fundamentals of Gold at present...
- The US dollar continues to weaken. The dollar is down 7% in the last 12 months and more than 10% from its March high. The dollar did flatten in August and held tightly in a range between 92-94. During this stability, gold weakened. Since December, the dollar has broken through the 92 floor and is again trending lower. This is positive for gold prices as a weaker dollar = higher gold.
- Gold does very well in periods of negative interest rates as short-term bonds and cash carry negative real returns. As the economy recovers and the fed holds rates low, the gap of negative yields will expand, and this is very bullish for gold. In the last month the negative yield has blown out to a new high after being flat from August-November.
- The delay in stimulus spending by the federal government caused gold to pause, but we are about to embark on a renewed stimulus push with the likelihood of a bill in the $700-1,000 billion range in the next few weeks, as well as a much larger package next year. Deficits should widen and the Fed will be forced to monetize this spending by flooding the system with money.
- Institutional asset allocations to gold is near historic lows, last seen in the late 1990's. As pension funds enter their annual allocation reviews over the next few weeks, it's highly likely they see these same charts & data we do and increase their allocations. Even a shift of 1-2 basis points from institutional asset allocation models would overwhelm supply and force prices up materially.
The bottom line is, we think we are in the early innings of a multiyear run in gold prices. It is also notable that most gold miners continue to reflect future gold prices of $1,500-$1,600 per troy ounce, despite the fact that the current price is $1,800. If gold prices hold at current levels or rise as I expect them to, valuations for miners will ultimately rerate and close this wide valuation gap.
Till we speak again, enjoy your week!
Is Stimulus Near?
WEEKLY UPDATE - December 7, 2020