The spot gold price soared to a record near $2,070 per ounce, and some leading gold stocks hit new heights, before the inevitable shakeout arrived in August as Covid vaccine approvals neared.
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Now the gold price is back under $1,800, testing a nearly 3-month low. Major investors including Warren Buffett have exited the safe-haven play as they bet on a robust recovery. His Berkshire Hathaway (BRKB) loaded up on shares of gold miner Barrick Gold (GOLD) in the second quarter but closed out the position in Q4, a new SEC filing shows.
The gold price charged back to $1,950 in early January amid rising odds that Democrats would take control of the Senate in Georgia’s runoff elections. and unleash a new flood of fiscal support.
Yet Democratic victories in Georgia, rather than fueling new highs for gold and gold stocks, sparked a sell-off. The problem: The additional trillions in anticipated federal spending brought forward expectations of Federal Reserve tightening, initially via slower asset purchases. Runaway deficits are key to the gold bull case long term. Yet even if that plays out, there could be major detours along the way.
On Wednesday, the spot gold price fell nearly 1% to $1,780. The SPDR Gold Shares ETF (GLD) that tracks the gold price is retesting its Nov. 30 low. The GLD gold play appears on the verge of flashing a technically ominous sign known as a death cross. That happens when the 50-day average falls below the 200-day line. Meanwhile, GOLD stock has slumped to its lowest level since April.
Berkshire’s move to dump the rest of its GOLD stock holdings in Q4, just two quarters after opening a position, should underscore that the momentum trade has been over for a while. If Buffett has reconsidered the wisdom of owning gold stocks in the current environment, does buying gold stocks or betting on a rising gold price make sense for individual investors?
Here are some key things to consider when deciding when, whether and how to invest in gold, either via gold stocks — such as Newmont (NEM), Kirkland Lake Gold (KL), Barrick Gold, Newmont and Franco-Nevada (FNV) stocks — or gold ETFs.
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Gold Stocks, Gold Price Hinge On Fiscal, Fed Policy, Inflation
Gold and gold stocks powered higher in the weeks after the coronavirus lockdown as the Federal Reserve and Congress uncorked a gush of liquidity and fiscal support. The yellow metal took off again as hopes for a V-shape recovery were splashed by a summer coronavirus wave.
Wall Street began to imagine an extended era of ultralow interest rates, multi-trillion-dollar deficits, a weak dollar and — eventually — a rekindling of inflation pressures.
In April, Bank of America put a $3,000-per-ounce 18-month price target on gold. However, Bank of America reassessed in November, predicting an average price of $2,063 for 2021. The firm turned neutral on gold amid belief that super-effective vaccines and stimulus would produce a strong cyclical recovery and push up long-term interest rates. Those conditions favor industrial metals over precious metals, the bank said.
Still, Goldman Sachs chief commodity strategist Jeffrey Currie in mid-November reiterated his $2,300 12-month target for gold. His bullish case for the gold price is built on a forecast for rising inflation expectations and “concerns around the longevity of the U.S. dollar as a reserve currency” amid huge deficits and rising debt. Because gold is priced in dollars, the gold price will tend to rise if the dollar weakens against international currencies, all else equal.
Gold stocks and the gold price should be supported by ultra-easy Fed policy, as policymakers test their new conviction that inflation is no longer a threat. But gold investors banking on a rekindling of inflation or breakdown of the dollar may be in for a long wait. Other metals are better bets at this stage of the cycle. Copper, nickel and lithium are all on the upswing as EV demand ramps. Silver, meanwhile, offers both precious metal and industrial metal characteristics, with a key role in 5G.
Real Interest Rates Are Key Factor
The gold price hit bottom at the end of 2015, just as the Fed hiked its benchmark interest rate for the first time since the financial crisis. But the gold price and gold stocks didn’t really begin to shine until the fall of 2018, when the Fed’s plan to keep hiking interest rates triggered a sharp stock market sell-off.
Gold’s persistent strength starting in late 2018 was driven by a fundamental change in the Fed’s thinking about inflation. Even as unemployment fell to a 50-year low, inflation pressures were a no-show. Now, after slashing its benchmark overnight lending rate close to zero, the Fed has said it won’t hike interest rates until inflation is firmly above its symmetrical 2% target.
Based on the most recent Fed projections, the first hike isn’t expected before 2024. However, the Fed could alter that outlook as Democrats pass major additional stimulus.
The common thread linking gold price highs and lows is real interest rates. As in 2020, real interest rates were negative during prior gold-price highs in 1980 and 2011, with two-year Treasury yields well below the rate of inflation.
In 1999, which saw the lowest gold price in recent decades, the Fed was in a rate-hiking cycle, raising its benchmark rate north of 5%, well above roughly 2% inflation.
Why do real interest rates matter so much for the price of gold? Gold is a store of value, but holding it comes with an opportunity cost. That money could instead be invested safely in Treasuries, for example. If real interest rates are attractive, holding gold is much less attractive. When real interest rates turn negative, holding gold usually pays off.
But real interest rates aren’t the only determinant of the price of gold. The supply-demand balance is among other important factors. For example, central bank sales of gold exacerbated the 1999 gold price slump.
Gold Investing: Gold Stocks And ETFs
Gold stocks and gold ETFs are the simplest way for individual investors to bet on a rising gold price. Investing in gold stocks can be riskier, but it’s also potentially a more rewarding way of investing in the precious metal.
Investors have three major options, aside from buying gold coins or jewelry. They can buy gold stocks individually. They can buy an ETF that tracks gold stocks, such as the VanEck Vectors Gold Miners ETF (GDX). Finally, they can get direct exposure to the precious metal itself via an ETF, such as the GLD ETF that tracks the price of gold.
Well-known gold mining stocks include Barrick Gold, Newmont and Kirkland Lake Gold stock. Another segment of the gold market is gold royalty companies. These provide financing to gold miners, typically in exchange for below-market-cost purchase rights of gold they produce. Examples of gold royalty companies include Royal Gold (RGLD) and Franco-Nevada stock.
You can research the top gold stocks, which are part of the broader Mining-Gold/Silver/Gems industry group, at IBD Stock Checkup.
Gold Mining Stocks: A Leveraged Bet On Gold
Investing in gold stocks or a gold-mining ETF is, to a large extent, a leveraged bet that the price of gold will keep rising. That’s because a higher gold price can have a dramatic impact on the profitability of gold miners. For example, Newmont has said its all-in sustaining cost of production is expected to be $970 per ounce of gold in 2021. That means increases in the price of gold above that level should go straight to the bottom line.
Yet corporate leverage works both ways: Falling gold prices can shrink the bottom line in a hurry.
Investing in gold-mining stocks, especially a specific stock, brings in more complications than investing in the precious metal itself. The companies can suffer accidents or production snafus, deplete their reserves or pile up debt. Recently, Barrick Gold has been mired in a dispute with Papua New Guinea over renewing the lease on its Porgera gold mine. On the upside, companies can increase mine output, find new reserves, or generate cost savings via mergers or mining productivity gains.
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How Gold Stocks Perform Vs. The Gold Price
In general, if you think gold has room to run, history would say you’re better off owning gold stocks than the yellow metal itself. However, if you think gold could be nearing a top, you’re probably better off holding gold than gold stocks, based on past performance.
Consider, from the gold price bottom in late 2015 through the August 2020 peak, GLD, the SPDR Gold Shares ETF tracking the commodity’s price rose 94%. Meanwhile, the VanEck Vectors Gold Miners ETF rose 244% over the same span. That reflects the dramatic corporate earnings improvement thanks to the higher price of gold. Improved earnings, in turn, allow mining companies to increase dividends as the price of gold rises.
Sometimes corporate dynamics — and changing perceptions of them — can take precedence. Even as the price of gold came down a bit, Franco-Nevada stock broke out to a record high in late December 2019, while Newmont stock hit a multiyear high.
Still, gold stock investors can never let down their guard. The descent for gold mining stocks from the 2011 price peak was much rougher than for the metal. To the trough in late 2015, GLD, which tracks the price of gold, tumbled 46%. Meanwhile, GDX, the ETF tracking gold miners, cratered close to 80%.
Go For Gold, Not For Broke
No matter your view of whether the price of gold is a good bet, it makes sense to subject investment decisions in gold stocks or an ETF tracking gold or gold stocks to the same rigorous process as regular stock buys. That means waiting for a proper buy point and a buy signal.
At the moment, none of the charts of IBD’s top-rated gold stocks, including Newmont, look particularly constructive. The same goes for GLD, which tracks the gold price, and GDX, a basket of miners.
To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
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