GLD: Gold To Become One Of 2018’s Top Performers – SPDR Gold Trust ETF (NYSEARCA:GLD)
Gold to Become One Of 2018’s Unexpected Top Performers
There is not a great deal of optimism surrounding SPDR Gold Shares (GLD) and gold lately. After all, why would there be? Gold is still down by about 30% from its 2011 highs, while stocks have surged, and digital assets are on fire this year. In the meantime gold has been just average, up by only about 10% in the last year. Nevertheless, gold did have a strong move higher following the latest Fed meeting, something I wrote was overwhelmingly likely to occur in this Marketplace article. More importantly, going forward into 2018 an economic landscape appears to be forming that should create significant demand for gold, and propel its price considerably higher.
GLD is the largest, reportedly physically-backed gold exchange traded fund in the world, with roughly $35 billion worth of net assets. GLD offers market participants an efficient way to access the gold market. The ETF is an attractive alternative to trading gold futures, as it can be traded much like a stock on the NYSE Arca exchange instead of dealing with alternative exchanges and trading requirements pertaining to futures contracts.
Furthermore, GLD is an appealing alternative to buying physical gold, as investors get similar exposure they would to the physical metal, but can buy and sell gold with great fluidity using GLD. This way investors bypass the inconvenience of having to take physical delivery of the asset when buying and delivering it when selling. GLD is a great transactional instrument for trading gold, yet I would encourage individuals to diversify or to invest in actual physical gold for the long term.
Since gold and GLD move almost identically in tandem I will be referring to GLD in addition to gold when discussing gold in detail throughout this article.
Why Own Gold?
Some of you may be asking yourselves a question, why own gold in the first place? Well, gold is a unique multifunctional asset. Gold has real intrinsic value based on many fundamental factors. It is indispensable to various industries, is used as a coveted substance in jewelry worldwide, has been implemented as a primary medium of exchange for thousands of years, is one of the world’s principal stores of value, and is the ultimate hedging instrument in times of uncertainty, turmoil, heightened inflation and other instances.
Gold performs particularly well as an asset class when inflation is higher than key rates. For instance, if widely held notes and bonds offer investors a yield of 2.2% and inflation is at 3.2%, this would mean that the real rate of return is negative 1%. This would make gold very attractive to investors, as they would be preserving capital by investing in gold, and as more market participants allocate their capital towards gold in this environment the price inevitably moves significantly higher. We witnessed this phenomenon play out in the mid-2000s, in 2009-2011, as well as in many other instances throughout history, and it appears that history may be getting ready to repeat itself.
Inflation Likely to Move Higher in 2018
The recent inflation data appears very bullish for gold. The last CPI reading came in at 2.2%, which is indicative of increasing inflation. Moreover, the PPI came in at over 3%, a multiyear high. Final demand goods were actually up by over 4% yoy. This is incredibly high indeed, and indicates that producers are paying higher prices to produce goods due to rising inflation and are absorbing the costs rather than pass them on to consumers at this point. Thus, the disconnect between the 3% PPI and 2.2% CPI. However, in the future, producers are likely to transfer costs to consumers which will spike inflation even higher.
The Fed’s Stance
I find it very interesting and telling that the Fed refuses to acknowledge the fact that inflation is heating up in the U.S. Outgoing Fed chair Yellen has called “low inflation” in 2017 “a mystery” and an “unexplainable surprise,” among other things. In fact, at her finally press conference the Fed chair claimed that the Fed sees economic growth, and GDP picking up in 2018, yet that inflation was somehow going to stay low. Is this just wishful thinking on the side of the Fed chair? Can GDP increase to 3% or 3.5% and have inflation stay below the Fed’s target rate of 2% at the same time?
I think it’s evident that this doesn’t make much economic sense. The Fed has been flooding the economy with cheap money for nearly 2 decades now. The current Fed policy path is part of a trend started by Alan Greenspan in the early 2000s when he lowered interest rates to about 1%, which enabled the inflating of the enormous housing bubble. Just look at some of the figures pertaining to the money supply, they are mind boggling:
- Monetary Base: 2000: $597 billion, 2017: $3.927 trillion, increase of 558%
- M2 Money Supply: 2000: $4.94 trillion, 2017: $13.8 trillion, increase of 180%
- Treasury Securities: 2000: $292 billion, 2017: $1.16 trillion, increase of 300%
- Derivatives: 2000: $93 trillion, 2017: $562 trillion, increase of 500%
The CPI, PPI, wage growth, or any other inflation indicator I look at is telling a story of rising inflation, which seems perfectly normal as the money supply has been drastically inflated over the past 15 years. The Fed seems keen on downplaying inflation, because it needs to in order to not raise rates too rapidly.
If the Fed acknowledged inflation was above its target rate of 2% then it would need to raise rates appropriately to combat rising inflation. “Appropriately” would likely put the bench mark rate close to 3%, which would put strain on the overall economy, stunt growth, cause a stock market selloff, and prick the Fed induced financial bubble we are currently living in. Since this is not an option for the Federal Reserve, it simply tells us that inflation is mysteriously low and is likely to stay that way for the foreseeable future.
Fed Likely to Stay Light on Interest Rates
The Fed’s dovishness and light stance on inflation suggests the Federal Reserve is likely to take its time with interest rates. Not surprisingly market participants only see the likelihood for 2 rate hikes next year. It’s actually one and done all the way out until September according to the Fed Watch Tool. Naturally this stance is very bullish for gold. The CPI, PPI, and other indicators are screaming inflation is high and likely going a lot higher, yet the Fed is claiming that inflation is surprisingly low and likely to stay that way, and is therefore in no hurry to raise interest rates.
Gold’s Safe Haven Bid
In addition to the very strong fundamental elements surrounding the price of gold, there are also external factors that could propel the yellow metal much higher in 2018. These could be black swan events, stock market corrections, and other peripheral occurrences that would drive investors towards gold and create a safe haven bid underneath its price.
Stock Market Correction: Beneficial for Gold
Stocks continue to hit all-time highs, seemingly every other day. The DOW set a record recently with 70 all time high closes. The S&P 500 set its own record in November with the longest streak ever without a 3% correction. Moreover, the VIX is at all-time lows and complacency is at all-time highs. This all suggests that a stock market correction is likely to materialize sooner than later, and when it does it is likely to propel gold significantly higher, as investors rush in to hedge their position using the gold market.
Furthermore, this will likely be a lasting move and not just a transient phenomenon, as inflation and increased volatility is likely to trigger real demand for gold, and market participants may not see a point to unwinding their gold positions after the correction concludes.
Digital Currency Debacle: Beneficial for Gold
Bitcoin (COIN) and other digital currencies have been on fire in 2017, with many returning thousands of percent to traders and investors. With such stellar returns it would not be surprising if a major correction were to materialize in 2018. The fear, panic selling, and other unintended consequences of the correction are likely to create additional demand for gold as investors search for a safe haven, and a trusted store of value to keep their capital safe in.
Geopolitical Tensions: Beneficial for Gold
Gold does really well when geopolitical tensions are hot and possible risks of an armed conflict ensue. I am not saying there is likely to be a war with North Korea, but the bottom line is that the situation is far from being resolved. Moreover, it is possible that some kind of military altercation takes place, perhaps even in Q1 2018.
Fears of a conflict are escalating, Kim Jung Un continues to launch missiles and perform provocative tests, and the Trump administration may be getting tired of it. After all, is it likely that President Donald Trump waits until N.K. has the full capability to strike the U.S. with massively powerful nuclear rockets capable of whipping major U.S. cities and regions from the face of the earth? My take is that it’s possible, but certainly not likely.
In fact, there are reports that the U.S. is actively planning to give N.K. a “bloody nose” attack. This basically means a limited strike. There won’t be any U.S. boots on the ground, or imminent regime change, but N.K.’s military and possibly nuclear assets are likely to be hit. Obviously, the unintended consequences of this could be horrible for the region and for the world in general, but then again doing nothing could turn out to be even worse. Regardless of the outcome, investors are likely to herd into gold if any military action becomes imminent.
We can see that the day before the Fed meeting marked a short-term bottom in GLD and gold. Prices have appreciated by roughly 4% since then and are now in the process of penetrating through a major resistance level of $120-$123 in GLD (roughly $1,290-$1,310 in gold). Once prices break through this resistance level GLD is likely to fly to the previous short term high of $128, roughly $1,350 in gold, and may very well penetrate it successfully this time. The CCI, RSI, and full stochastic are all pointing to a shift towards positive momentum, suggesting that further upside in GLD and gold is very likely.
Gold entered what is likely to grow into a multiyear bull market in the beginning of 2016, and is now in the process of establishing a new base at around $1,250 to launch from. Rising inflation, relatively low rates, easy Fed policy, a declining USD, and other fundamental elements are all favorable fundamental factors that are likely to propel gold significantly higher in 2018. Moreover, there is a growing possibility certain peripheral events may materialize that will also be very bullish for gold prices. These elements indicate that gold could become next year’s surprise top performer, and the yellow metal should appreciate meaningfully higher from current levels.
Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long GLD GDX GDXJ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long gold futures, silver futures, and Bitcoin.