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Why now may be the time for gold

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Despite the strong performance in global equities, gold futures have appreciated roughly 14% or U$160 per ounce since the beginning of the year, outpacing the S&P 500 stock index in US Dollar terms (up 11%), the ASX 200 (flat) and many other asset classes. Gold is often regarded as a ‘safe haven’ asset along with currencies such as the Japanese Yen or Swiss Franc.

But experienced investors know that there is no such thing as a ‘safe’ investment and you don’t need to look too far back to see why. Gold dipped around 30% during the global financial crisis in 2008 and the price of the precious metal tumbled around 40% between mid-2011 and 2013, before falling even further to hit a low of U$1,040 in late December 2015. If you bought gold at the wrong time, you could have lost a lot of money in a very short period of time.

However, prices have rebounded nearly 30% or U$300 over the past two years, coinciding with a time in which U.S. stocks have continuously made new all-time highs. Wise-owl picked up this potential ‘reversal’ very early in the cycle and we issued our first buy recommendation on the gold sector in May 2015. As the signals remained bullish, we have increased exposure several times by carefully selecting high quality companies that will likely benefit from a potential recovery in the gold market.

What factors impact the gold price?

Bullion prices are impacted by a number of factors including inflation, interest rates, market sentiment, the USD and physical demand. Many investors continue to believe that gold is an asset that acts as a hedge against adverse market movements or geopolitical threats, thus long-term price movements of gold often reflect broader anxiety about politics or the value of money.

In the 1970s, the time of ‘The Great Inflation’, gold prices soared over 1,000% (from ~U$40 to over US$400) as inflation spiralled out of control, eating into the purchasing power of cash. In times of uncertainty the price for insurance tends to rise which is reflected in higher gold prices. At least that’s the common belief. One could argue that gold is often victim to something called a ‘self-fulfilling prophecy’. Fund managers and traders anticipate higher prices and therefore jump on the bandwagon and push prices even higher.

Where is gold heading next?

While there is no guarantee that the yellow metal will continue to march higher over the next 12 months, my view is that current market dynamics and overall balance of risks are stacked in favour of gold. And if you pay attention to the details, you will gain important insights that can assist with the decision making process. 

Let’s talk about inflation for example. The US Consumer Price Index (CPI) remains below the Federal Reserve’s target of 2% and the market expects inflation to remain low. And yet gold experienced strong gains in the past two years. Going forward, a tight job market will likely boost wages, leading Americans to spend more and push up consumer prices. Add to that a relatively weak USD and the possibility that the Federal Reserve will raise rates more slowly than anticipated and there is a good chance that the bond market is underestimating inflation.

Gold tends to perform well during periods of higher inflation, which is something central banks around the world are pushing for. There are many more factors to consider and while gold prices may fluctuate over the coming months, the overall balance of risk is favourable and investors should consider allocating a small amount towards the asset class as part of a well-diversified portfolio.

How can I play the recent gold rally?

There are many ways investors can invest in gold. Futures trading, gold exchange-traded funds (ETF) or buying physical gold bullion are just a few. I don’t endorse any of these investment options, nor would I claim to be an expert.

Wise-owl specialises in small- and mid-cap research and we use a bottom-up investing approach. We scan entire markets or sectors and carefully select those stocks that have the greatest probability of rising. Our strategy over the past couple of years has been to invest in high quality companies with a positive correlation to the gold price.

The table illustrates the year-to-date performance of some of the best-known gold companies listed on the ASX.

Ticker

Company

Total Return YTD

NST:ASX

Northern Star Resources

39.50%

SAR:ASX

Saracen Minerals

37.88%

SBM:ASX

St Barbara Ltd

31.37%

RRL:ASX

Regis Resources

27.27%

EVN:ASX

Evolution Mining

6.60%

NCM:ASX

Newcrest Mining

6.37%

RSG:ASX

Resolute Mining

-18.46%

Source: nabtrade (as at 25 September 2017). Performance information does not factor any distributions, transaction costs or fees.

It should be noted that as with any investment, buying gold isn’t without risks. The asset class can be volatile and factors which typically support the gold price may not eventuate. Investors also need to consider the unique risks of whichever structure they choose to gain exposure with (e.g. buying a bullion ETF will have different considerations to investing in individual gold shares).

Wise-owl picks

Wise-owl picked up the trend early and issued a number of buy recommendations in the gold space. Exclusively provided to nabtrade readers, find below some of our recommendations which we retain our buy calls and price targets on:

Regis Resources (RRL:ASX) – August 2017 at $3.90

Gold Road Resources (GOR:ASX) – February 2016 at $0.43

Click here for a 21 day free trial to Wise-owl to receive all of our stock recommendations.

Simon Herrmann is an – Equity Market Analyst at Wise-owl.com. This information was produced by wise-owl.com Pty Ltd (ACN 097 446 369), which is an Australian financial services licensee (Licence no. 246670). This material is intended to provide general advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. The author has no personal interest in the stock mentioned in this report. This article does not reflect the views of nabtrade.