A few weeks ago we wrote that this is The season for gold. At the time, our reasons for being bullish on the “barbarous relic” were mostly to do with negative economic news coming out of the United States, including a bond yield curve inversion, signaling a recession is on its way.
Gold’s current movement is not so much related to economic malaise, but rather, is being judged against bond yields and what the Federal Reserve is going to do next. The precious metal is trading near a six-year high as US real Treasury yields skid along at practically 0%.
On the cusp of the Federal Reserve’s decision to lower, hold or raise interest rates, we now have another reason to own gold: popping asset bubbles.
An esteemed strategist at Societe Generale SA is reportedly advising clients to buy gold as a hedge against asset bubbles likely to grow even larger if the Fed follows through on a decision to cut rates.
“Gold is the perfect response if you’re entering the bubble game,” Alain Bokobza, head of global asset allocation, told Bloomberg from London. “Every time you have such a situation, gold has soared.”
Forbes gives some good evidence of a bubbly stock market. On July 26 the S&P 500 hit a new all-time high, the best performance for the first seven months in 22 years. But price to earnings ratios are way out of whack. For the S&P 500, p/e ratios based on the last four quarters of net earnings are at 22.5, compared to an average 19 for the last 20 years and 16 over the last century.
Those expecting all the fun to continue may be in for a shock. “High prices today mean puny gains tomorrow. From these levels, what returns can investors reasonably expect?” Forbes warns. “Multiple expansion as a source of gains seems tapped out.”
Not so for gold. The metal used mostly for jewelry and investments is poised for another leg up after the Federal Reserve’s July 31 meeting.
At its meeting in June, Fed Chair Jerome Powell strongly hinted that a rate cut – the first in a decade – was coming, which lit a fire under the gold price. Gold investors love low interest rates because that could weaken the dollar, thereby pushing up commodity prices and making dollar-priced investments like gold attractive. The idea of monetary easing causing inflation also appeals to gold investors, since the precious metal is known to hold its value over time versus depreciating fiat (paper) currencies.
The gold price is also being lifted by negative interest rates on sovereign debt, at just about every developed-country’s central bank except the United States.
If investors have to effectively pay for lending money to borrowers, gold is seen as a better investment.
Richard (Rick) Mills
subscribe to my free newsletter
Ahead of the Herd Twitter
Legal Notice / Disclaimer
Ahead of the Herd newsletter, aheadoftheherd.com, hereafter known as AOTH.
Please read the entire Disclaimer carefully before you use this website or read the newsletter. If you do not agree to all the AOTH/Richard Mills Disclaimer, do not access/read this website/newsletter/article, or any of its pages. By reading/using this AOTH/Richard Mills website/newsletter/article, and whether or not you actually read this Disclaimer, you are deemed to have accepted it.
Any AOTH/Richard Mills document is not, and should not be, construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
AOTH/Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified. AOTH/Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of AOTH/Richard Mills only and are subject to change without notice. AOTH/Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, AOTH/Richard Mills assumes no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this AOTH/Richard Mills Report.
AOTH/Richard Mills is not a registered broker/financial advisor and does not hold any licenses. These are solely personal thoughts and opinions about finance and/or investments – no information posted on this site is to be considered investment advice or a recommendation to do anything involving finance or money aside from performing your own due diligence and consulting with your personal registered broker/financial advisor. You agree that by reading AOTH/Richard Mills articles, you are acting at your OWN RISK. In no event should AOTH/Richard Mills liable for any direct or indirect trading losses caused by any information contained in AOTH/Richard Mills articles. Information in AOTH/Richard Mills articles is not an offer to sell or a solicitation of an offer to buy any security. AOTH/Richard Mills is not suggesting the transacting of any financial instruments but does suggest consulting your own registered broker/financial advisor with regards to any such transactions