The past few weeks saw some fantastic rallies in precious metal prices. Gold, in particular, is spearheading the sector higher.
After consolidating beneath the $2,100 level for almost four years, the yellow metal suddenly took off this year. Price vaulted, with relative ease, through the next three hundred-dollar round number resistance levels in quick succession ($2,100, $2,2200 and $2,300), before encountering some selling pressure at $2,400. Some say gold has completed a once-in-a-decade ‘cup and handle’ formation – a formation that is suggesting much more upside (see below).
What caused this leap? Many factors. The first is, of course. the sustained rise in geopolitical tensions around the world. The war in Ukraine is still ongoing, plus the renewed military conflicts in the Middle East. During a period of heighten political uncertainty, people buy gold. Next is the prolonged rise in prices globally. Inflation, it appears, is stickier than expected. Historically gold is viewed as an ‘inflation hedge’. The third reason is technical buying by trend following funds. New price high shows demand is outweighing supply. This imbalance pushed gold prices to record highs. Many momentum funds chase strength.
The last reason is deficits. According to a commentator in the Financial Times, Rana Faroohar, she pointed out that the “most recent congressional Budget Office projections put US debt at 99 per cent of GDP by the end of this year, and have it on track to reach 172 per cent by 2054.” When deficit balloons, investors seek safety, probably in gold.
Note that gold’s explosive rise happened despite the rise in interest rates.
Source: incrementum
Can you trade and invest in gold?
Yes, you can. During the Great Depression, however, US citizens can’t even own gold legally. But that has changed, especially after gold was delinked from the US Dollar in 1971. These days you can acquire gold exposure in many ways, including:
- Physical gold (bars and coins)
- Gold futures contracts
- Gold funds and exchange-traded funds
- Gold miners shares
- Spreadbetting gold prices
- Gold options
You can trade gold via a number of financial brokers.
Below I will just show one such instrument to gain a quick exposure to gold price. This is the SPDR Gold Shares ETF (GLD), one of the oldest ETFs in the market.
The instrument holds physical gold. According to its latest factsheet (April 2024), the size of the fund is valued at a decent $63 billion.
Did you know, in 2011 this gold fund was once the world’s largest ETF, beating SPY? Of course, after a decade of equity bull run since, S&P 500 (SPY) has amassed assets of $497 billion. Imagine what will happen to gold prices if this gold fund were to quadruple its assets….
What are the risks in buying gold?
From the investment point of view, all assets carry risk. Not all that glitters is gold.
Warren Buffett, for example, has advised the public against buying too much gold. This is because the metal has no earnings, dividends, and certainly no growth.
“Gold,” explained the guru, “has two shortcomings, being neither of much use nor procreative….if you own one ounce of gold for an eternity, you will still own one ounce at its end.” That’s right, gold does not grow, nor compound. In his eyes, gold is inferior to the likes of Coca-cola (KO) and Apple (AAPL) since these fantastic companies grow over time, do share buybacks, and distribute dividends.
For example, since late 2022 Nvidia (NVDA) rocketed nearly 900 percent as its revenue soars from increased AI usage. You will not find these sort of mad growth in gold, ever.
Another risk come from leveraged positions in gold. Whenever traders borrowed money to increase the position size in gold, it invites troubles. Gold prices can be very volatile at times.
Therefore, investors should only allocate a sensible amount of their portfolio in gold, and only trade the metal if they have sufficient technical knowledge to do so.
Is now a good time to buy gold?
Gold Price Outlook
Name: Gold
Description: Gold is a precious metal with ornamental, industrial and monetary uses and one of the oldest commodities known to humans. As a commodity to hold as an investment in times of geopolitical tensions; it is only natural that gold prices rallied as conflicts in many parts of the world surged. Given this bullish backdrop, Gold buyers are therefore anticipating a bullish 2024. This time, perhaps gold prices will break to new all-time highs north of $2,400 an ounce.
Is gold a buy, sell or hold?
Many old market timers always tell you to hold some gold. Why? Because they always remember the explosive rise in gold prices during the seventies, before the invention of internet or bitcoin. Gold was the asset to hold then.
In 1971, gold was trading at $35 a troy ounce. A mere decade later, it soared to $800! That’s a 22x increase (see below). And unlike many stocks that went bankrupt in the past 50 years (prices collapsed to zero), gold never revisited those double-digit levels again. I doubt that it ever will.
By this logic, gold prices are a long-term hold. Even during 2016 when the entire commodity was fairly depressed, gold never broke below the key $1,000 support level. For long-term investors, gold is like an anchor in one’s portfolio. Never the most entertaining asset; but one that will not lose its entire value.
Of course, that’s from a long-term perspective. Over the near term, however, anything can happen. Sometimes, gold will just move sideways for years, doing nothing interesting in particular.
These days, gold prices are technically moving into short-term overbought territory. That’s reasonable following a six-week rally. A modest correction, perhaps a re-test of the former resistance at $2,100, is thus a distinct possibility. This is just to reaffirm that level as support.
Given that gold’s medium-term trend has just turned positive, corrections are to be used as accumulation opportunities. ‘Buy the dips’ as they often say during a cyclical bull market.
Pros
- Continuation of currency debasement across the world
- A store of value historically and an inflation hedge
- Demand from major central banks
Cons
- No earnings, or dividends
- Volatile prices
- Holding costs of physical gold
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Outlook
(5)
Overall
5
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
