Hello, Reader.
Some of the best portfolio hedges lose money glacially, while waiting to deliver a gain volcanically.
Gold, the “Granddaddy of Portfolio Hedges,” has demonstrated this tendency many times over the decades…
During the last 40 years, for example, the Philadelphia Stock Exchange Index of gold and silver stocks (XAU Index) has produced a total return of roughly zero, while the S&P 500 Index has produced a total return of nearly 2,000%.
Crazy, but true. The price of the XAU Index is lower than it was in March of 1984; but thanks to dividends, the index delivered a slight gain during that four-decade period.
Dismal results like these reinforce the idea that gold is a dead-end investment that has no place in the modern world.
However, there are some bullish factors currently rallying behind price of gold. So, is the precious metal a good investment right now?
The short answer: yes.
So, in today’s Smart Money, I’ll share the reasons why – including the four factors that could drive gold prices higher. I’ll also review another metal that is offering an opportunity right now.
Hedging With Gold
Digging a little deeper into 40-year analysis from 1984, let’s take a look at the specific decade-long span from November 2000 to November 2010, when gold stocks soared more than 450%.
During that identical 10-year period, the S&P 500 and Nasdaq Composite both delivered losses.
In other words, during that grim decade for stocks, gold stocks were one of the only assets to produce a gain.
Of course, past results are no guarantee of future returns, especially not when there’s a new kid in town called Bitcoin. If, as its many fans believe, Bitcoin has become the “new gold,” no place remains for the “old gold.”
Perhaps that’s true, or perhaps the “new gold” has not yet encountered the sort of trial-by-fire that the “old gold” relishes. Bitcoin has not yet faced any extreme financial crises, severe geopolitical trauma, or crazy “Black Swan” events.
Let’s all hope Bitcoin – and gold – continue to enjoy many years of relative calm. But if something unexpected disrupts the calm, the cryptocurrency might not provide the portfolio hedge its adherents expect.
To be fair, gold might not either. But at least the yellow metal has a lengthy and verifiable track record of thriving during periods of crisis.
Additionally, the cost of implementing a gold hedge has rarely been cheaper than it is today. As the chart below shows, the price of the XAU Index, relative to the S&P 500, hit a new all-time low three weeks ago. Using price-to-EBITDA valuations, instead of price, the XAU is merely close to all-time lows.
Obviously, these extreme pricing and valuation disparities do not guarantee that gold stocks will soon begin closing the gap between themselves and the S&P 500. But they do suggest that the gold market is offering an attractive entry point, at least for a trade.
For example, if the XAU Index merely traded up to its average valuation, relative to the S&P 500, it would triple!
Other than low valuations, four additional factors are tipping the scales in favor of speculating on the gold. In no particular order, the gold price could benefit from…
- Falling interest rates – The gold price almost always rises when interest rates trend lower. Most recently, the gold price rocketed higher from 2001 to 2011, when the Federal Reserve was systematically suppressing rates. Then again, the gold price soared during the pandemic when the Fed was holding rates close to zero. Chairman Powell reiterated on Wednesday that his team intends to initiate a new rate-cut cycle by lowering interest rates three times this year.
- Weakening dollar – Because interest rates are falling, the dollar exchange rate might also drift lower. A weak dollar usually manifests itself as a strong gold price.
- Rising geopolitical tensions – Almost nothing benefits from geopolitical tension or wars, other than weapons manufacturers… and gold. Hopefully, the current tensions around the world moderate throughout the year. But the mere possibility of growing instability could support a strong gold price.
- Central Bank Buying – On a net basis, the world’s central banks have become large, consistent gold buyers. In 2022, they bought more than 1,000 metric tonnes – equal to more than one-quarter of the world’s annual gold production. Central bank buying, by itself, will not trigger a major gold rally. But that buying could help power a rising price trend.
Given the bullish factors that are aligning behind the gold price, the yellow metal seems likely to deliver some upside surprises over the coming months.
But please remember, gold is not an investment in the classic sense of the word. It defies traditional investment calculations. Excel spreadsheets are useless.
That said, gold and gold stocks sometimes offer wonderful trading opportunities. On occasion, the stars align so completely on this mystical metal that a compelling speculation presents itself.
I believe such an opportunity is presenting itself now. In fact, I added two new gold plays in my The Spectacular service just yesterday.
Capitalizing on Metals
However, this yellow metal isn’t the only one offering an opportunity right now…
While not gilded, lithium is the lightest metal on earth. Since it is the lightest material that can store energy, it has become indispensable for the batteries that power the new digital economy.
We need it for all the devices, gadgets, and sensors in our homes, businesses, and pockets… for the electric vehicles that are the fastest-growing segment of the transportation sector… and for large-scale battery farms to capture the power we get from solar and wind farms.
That’s why the discovery in the crater of an ancient volcano here in the U.S. is so important. It holds the single largest deposit of lithium anywhere on Earth.
And just one company is poised to exploit the deposit and could be only months away from full scale-production.
Those who understand the importance of this discovery have a tremendous opening to capitalize on soaring demand for a resource that’s absolutely critical for the modern economy… and that is in very short supply here in the U.S.
Regards,
Eric Fry
P.S. There’s about to be a lot of opportunity out there beyond the Magnificent 7…
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