Since the end of May, gold has been on a run unlike we have seen in over five years – up 10.5%. The last time gold reached $1,400 per oz. was back in 2013. While silver (the other precious metal) is up 6.4% during that time as well, it continues to lag. Presently, the gold/silver ratio is at its highest level over the last ten years at over 92x. From our perspective, this is likely partly due to the fact that silver is seen as having more industrial uses, and therefore, is impacted both positively and negatively by economic growth expectations as well.
Another way to look at the recent interest in gold, is to consider the volatility of the gold price below:
Source: Bloomberg as of 6/25/19
There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin
We believe this kind of volatility that coincides with rising prices tells a very positive story of intense investor demand.
Some of this interest in gold, in our view, is being brought on by the global trade wars and the potential for it to degenerate into a full-blown currency war as well. We have found there is significant evidence that China is buying up gold at a rapid pace — according to the World Gold Council they bought 146 tons of gold in the first quarter of this year, the most since 2013. At the same time, China has been selling US Treasuries. Russia has been a big buyer as well. A little collusion, perhaps?
Further, with the prospect of further monetary easing being served up by central banks around the world after ten years of almost non-stop monetary stimulus, we believe investors are concerned that global economies and their currencies are on a downward spiral that will end badly. And, in their opinion, we agree that we are closer to that reality than ever before.
Finally, while most observers think of gold as a hedge against inflation, we think it also performs well in a deflationary environment. With central banks struggling and straining to reach their inflation targets (generally, around 2%), it’s no surprise that gold is considered a compelling investment option.
That all said, we advise caution. While it seems prudent to us to have a small allocation to gold or silver as part of an alternative allocation to potentially reduce volatility and risk relative to traditional asset classes, gold (like Bitcoin) as an investment, we believe it is purely a momentum vehicle. And momentum cuts both ways with the downside often as punishing as the upside is rewarding. In the short run, even professional traders typically find it very difficult to identify the inflection points as they are happening.
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The views presented herein are those of Validus Growth Investors, LLC and are provided for informational purposes only. The information is current as of June 2019 and is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus Growth Investors, LLC or any other investment professional.
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