Gold is on a tear. The price of gold ($1775/ounce) has exploded with gains of 55% since it hit a 5-year low of $1146.85 in November of 2015. Will it blow past its all-time high of $1895/ounce, set in September of 2011 after the U.S. was stripped of AAA status by Standard and Poor’s? Or will it drop like a rock and stay there, like gold prices did in 1980, after hitting an inflation-adjusted high of $2,235? Is silver a better bet now?
Gold’s Relationship with Stocks
Gold ETFs and Index Fund Risk
Mutual Fund Redemption Suspensions
COVID-19 Gold Miners Risk
Relationship with Monetary Supply
Gold/Silver Relationship and Price
And here’s a little more color on each topic.
Gold’s Relationship with Stocks
Historically, and over the past 5-10 years, gold has had an inverse relationship with stocks. When stocks drop, gold soars, and, vice versa, when investors swoon over stocks, gold sinks. The metals are volatile. They spend decades slumbering and then soar.
ETFs and Index Fund Risk
In early March, when the Dow Jones Industrial Average lost 35%, gold miner stocks, like the ETF RING, lost 46%. The leveraged 3X gold miners bull fund NUGT dropped almost 90%, with the majority of the losses concentrated between March 10th and March 13th. Gold dropped 12% between March 6 and March 19, 2020, but stabilized by April 7, 2020. Both gold prices and RING are at 5-year highs. NUGT is still off 66%.
On March 15, 2020, the Federal Reserve Board had an emergency meeting. They cut interest rates to zero, and injected liquidity into a number of markets – including ETFs – that had frozen up. According to Jerome Powell, the chairman of the Federal Reserve Board, in his press conference on March 15, 2020, “In the past week, several important financial markets, including the market for U.S. Treasury securities, have at times shown signs of stress and impaired liquidity.” The Federal Reserve Board has been purchasing (rescuing) ETFs. Gold ETFs have not shown up on the list.
A fund company can get into trouble with products unrelated to gold that impact the liquidity in all of its products. MF Global, which declared bankruptcy in 2011 due to the Greek bond bailout, took the company’s gold investors down with it, even though gold prices were at an all-time high. (The NY Times reported in 2013 that investors were made 100% whole, however.) Direxion Funds had a GUSH 3X Oil Bull Fund (which is now a 2X fund). It’s very likely that the implosion of that fund was the culprit behind the NUGT free fall and splat.
Mutual Fund Redemption Suspensions
2020 has seen a spate of redemption suspensions of global mutual funds, mostly in Europe. However, there are funds in the U.S. that allow this, too. In 2017, money market funds adopted redemption gates and liquidity fees as a way to prevent a run on the bank. GLD, the largest gold ETF in the world, can suspend redemptions. The Coronavirus Recession has already proven to prompt a rapid increase in redemption suspensions. So, it is important to be aware of the risk in all funds, including gold funds, given the global recession.
COVID-19 Gold Miners Risk
Several gold mines had mining operations suspended due to the coronavirus in the 2nd quarter of this year. The time periods of the closures vary by company and country. However, the impact is widespread. Many South American countries that are rich in natural resources have been heavily, negatively, impacted from the virus.
This will reduce production for the 2nd quarter of 2020 and operational results. So, even though RING is back near a 5-year high at $30/share, it’s very possible that the upcoming earnings season will hit all of the miners, and gold and silver mining ETFs. The higher price of gold will be a positive, once production gets back on track.
Relationship with Monetary Supply
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Milton Friedman.
Of late, we have been far more concerned with deflation. We’ve seen oil prices turn negative. The Consumer Price Index was down -0.1% in May of 2020, according to the Bureau of Labor Statistics. However, consumer prices for food at home jumped 4.9% year-over-year. Home prices are unaffordable in 2/3rds of U.S. cities. Health care costs have gone astronomical, while wages have stagnated for decades. Stocks are higher than ever. Debt is astronomical.
Home prices and stock prices don’t get included in the CPI because they are assets, and thus a part of your wealth. However, that wealth is leveraged, and we saw home prices drop by half in the last recession. Additionally, there are still 3.5 million homes that are severely underwater – even now, with real estate at all-time highs. That is why mortgage-backed securities are still a problem that had to be bailed out March 15, 2020, when the Federal Reserve Board came marching in to try and save the economy.
Meanwhile, we’ve never seen this much paper floating around. The public debt is $26.4 trillion. Consumer debt is $14.3 trillion. And the total U.S. debt and loans has now topped $77.6 trillion. All of this leverage is astonishingly high – far more in the stratosphere than it was in the unprecedented Great Recession. U.S. leverage was already at alarming levels before the coronavirus began to impact the economy.
Incidentally, the late 1970s, when gold prices soared to their all-time high (higher on an inflation-adjusted basis than today’s gold price), is a period known as The Great Inflation. According to Michael Bryan of the Federal Reserve Bank of Atlanta, “The origins of the Great Inflation were policies that allowed for an excessive growth in the supply of money—Federal Reserve policies.” The Feds have justified the most recent infusion of liquidity as necessary to prevent an entire freeze-up of several paper assets from T-Bills to mutual funds, ETFs, bonds, U.S. dollars and more, particularly in the highly leveraged bond and mortgage-backed securities markets. The real question is why didn’t they tighten money supply before the recession? Why didn’t they fix the roof while the sun was still shining?
Gold/Silver Relationship and Price
Between 1970 and 1980, the value of gold increased over three-fold. Silver soared by a factor of seven. Between 2000 and the all-time high in September of 2011, gold increased five-fold. Silver popped almost eight-fold. Gold and silver both gain favor when people lose confidence in the purchasing power of their dollars. In the late 70s, that was due to the Great Inflation (and the U.S. being awash in paper money). Today, the U.S. is again swimming in paper. If you look at assets (real estate and stocks), health care costs and debt, we have run-away inflation. The prices are in bubble land, and are vulnerable to massive losses, just as they were in 2008 and 2000. (Low interest rates create bubbles.)
Currently, gold is hovering very close to the September 2011 high. Silver is still 68% lower than its highs set back in 2011. So, silver appears to be the better value. Both precious metals should rally when people get concerned about the dollar or the amount of paper money in the system. Nations like China and Russia have been building up their gold reserves. The easiest way to invest is through ETFs. However, as noted above, there is an increased risk to that.
What’s Your Best Strategy?
Given the volatility in silver and gold, it’s best not to bet the farm on these precious metals. After the peak, the prices tend to drop like a knife and slumber there for decades. However, you can definitely make a case for having a slice or two of gold and silver in your investment plan. The trick is how to play that. In the past, I would have just gone in with RING or NUGT. However, the liquidity crisis of March 2020 teaches us that funds have their own problems that can severely and negatively impact the performance of the gold. Direxion’s 3X gold miners bull fund is now a 2X fund, and it is not living up to its name and mandate in the least.
Physical gold is increasing in value alongside the price of gold. However, it comes with all of the challenges of owning coins, bars and bullion, including insurance, storage, the threat of theft and the possibility of being swindled or preyed upon. If you’re willing to invest the time and expertise to get this right, then holding physical gold, in moderation, could pay off.
In a world where there is just too much paper floating around, hard assets should hold their value better. However, in the Apocalypse, it will likely be easier to trade a loaf of bread, a bottle of water or perhaps even an Internet connection than a gold coin. So, don’t bet everything on gold. A good plan is always diversified.
Tune into a playback of my free gold videoconference for additional information.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.