Recession concerns abound. Manufacturing worldwide is slumping, with the latest read in the US pointing to outright contraction.
The much-feared yield inversion has occurred, linked historically with a follow-on recession. Haven assets, including sovereign debt, precious metals, and non-cyclical dividend paying stocks, have attracted much buying interest, as investors try to protect their assets.
Meanwhile, the trade wars have heated up, with both China and the US launching additional tariffs this month, even though most economists preach free trade as the elixir to rising standards of living. There are threats to levy European tariffs on goods ranging from autos to French wine.
Geopolitical concerns abound. All eyes watch nervously on the outcome of the Hong Kong protests. The Brexit process appears to be an unmitigated disaster. The Argentinian and Italian political situations do not inspire confidence.
Notwithstanding, our message is to avoid overreaction to recession concerns. Don't forget the old saw that the stock market has predicted eleven of the last five recessions. The US consumer, representing the bulk of the world's largest economy, remains healthy, enjoying a strong job market, rising wages, and positive sentiment.
US policy makers, indeed, policy makers around the world, are poised to provide whatever support they can. The current low interest rates provide a tailwind for risk assets like stocks, corporate capital expenditures, big ticket purchases by consumers, and all types of real estate.
Nevertheless, investors can't help but notice the rapid run up in gold prices as recession fears mount. Indeed, gold has outpaced the stock market, up just shy of 20%; Fidelity’s best performing fund this year has been its fund targeting gold mining companies, namely the Fidelity Select Gold Portfolio (FSAGX), up a whopping 38.2%.
The question for investors is, given recession chatter and gold’s rise, should you invest in gold now?
The most important principle in investing is diversification. Therefore, some exposure to gold, an asset class that does not move in lockstep with other assets, makes sense. However, we would not buy simply in response to the recession worries, which may or may not be right, nor in response to the run up in prices. Investments in gold mining shares may provide more upside and better tax outcomes.
Why You Should Own Gold
Gold exposure provides diversification not easily obtained elsewhere. It has a successful track record over the centuries as a hedge on inflation and other market calamities.
Gold also has no correlation with stocks, and at times has a significant negative correlation. That means gold is unlikely to tank when stocks do, so it can cushion volatility in your portfolio. We think all investors should have some exposure, up to 5%.
Why Gold May Be Timely Now
One of the knocks on gold is it pays no interest. It’s like cash; it does not depend on anyone else's promise, so there's no risk. In any event, with low interest rates the cost of carry is low. Gold pays no income but in today’s economic environment the income forgone is less.
While most asset classes are at all-time records, gold is not. It is well below its all-time peak of over $1900 in 2014.
Recession worries can't be dismissed. If a recession does take hold, stocks may not hold up, as earnings could weaken. Gold may soften the hit.
Global tensions due to trade wars and other geopolitical challenges are a fact. This could cause more people to flock to safe havens like gold.
Many investors are momentum driven. They see see gold rising and want to hop on the band wagon. This phenomenon could also drive up prices.
Gold is related to cryptos like Bitcoin and libra. They appeal to those who crave privacy and freedom from government interference. The rise in the cryptos has spurred interest in alternatives to government money. This is a positive for gold.
Recently, however, threats by politicos to regulate cryptos and libra have cooled interest in them. That may leave gold as the best alternative to government money.
Reasons for Caution on Gold Right Now
Gold has outpaced the stock market this year and so it is no longer as out of favor as it had been. In fact, it’s the most expensive it’s been over the last 6 years. The renewed interest in it is, from a contrarian perspective, a negative.
There could be a new crypto or even more interest in existing cryptos that soaks up interest in gold as a government money alternative. Gold is cumbersome to handle or trade, and the world is turning to online commerce.
Buying gold as interest rates declined has turned out to be very profitable. However, interest rates are now so low some analysts see a bit of a bubble in them. The lower rates could reverse course. If rates rebound this could increase the cost of carry, dampening gold's price.
Best Ways to Play It
Perhaps the easiest way to invest in gold is to buy it on the stock exchange. This avoids the risk of theft, sales taxes, storage costs, etc. An excellent, liquid choice is the SPDR Gold Shares ETF (GLD). Each share represents an interest in gold in the vault; your transaction and carrying costs are low.
As a more leveraged way to gain exposure, consider the stocks of gold miners. Gold mining companies have fixed costs so any increase in the price goes right to the bottom line as profit; any decrease reduces net income as there is typically no way to make offsetting cost cuts.
There are other advantages to investing in gold via gold stocks. Stocks have more favorable capital gains treatment in the US than “collectibles” like gold. Stocks may pay income.
Stocks have disadvantages, however. Mining companies are prone to not performing in line with gold due to strikes, floods, government expropriation, etc.
To minimize the risk of an individual gold mining stock, buy a basket or perhaps a fund of them. Consider exchange traded fund VanEck Vectors Gold Miners ETF (GDX). It is an easily traded ETF of gold mining stocks and offers broad exposure to the sector.
Consider, also, ASA Gold and Precious Metals Fund (ASA). It is a closed end fund allowing for the purchase of a basket of such stocks at about a 17% discount to their current net asset value. However, with a market cap of just $262 million it is best suited for small investors.
In sum, having always some gold exposure is smart portfolio management. Chasing it now just because it’s in vogue could be a mistake. The best way to obtain exposure could be through a fund of gold mining stocks.
Mr. Dietze and family members hold ASA. Clients hold GLD and ASA. Neither Mr. Dietze, his family, nor clients hold GDX.
Note: David G. Dietze, JD, CFA, CFP™ is President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit.
For over 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. Contact David Dietze, Claire Toth, Donna St.Amant, and Elaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at firstname.lastname@example.org.
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