3 Reasons the Gold Price is at a Tipping Point

Investors often hear that they should include gold in their portfolios, and with the yellow metal’s price on the rise this year those calls are only getting stronger. 

Speaking in a webinar on Tuesday (April 28), Mark Stacey, head of portfolio management at AGF Investments, made the case for why gold is at a tipping point, saying that now is the time for investors to seriously look at adding it to their portfolios if they haven’t already.

“I think there’s a number of reasons why people have not been investing in gold, but now is the time to consider it — it should be part of your portfolio,” he began by saying.

Read on to learn the three reasons Stacey thinks the macro environment is becoming more supportive of gold, plus his thoughts on if investors should focus on gold or gold stocks.

1. The US dollar is starting to slow down

Stacey pointed first to the US dollar’s recent performance, putting up a chart showing its rolling 12 month return compared to the rest of the world’s currencies. “You’ll notice that from our perspective it’s starting to wane, it’s starting to slow down,” he said.

“That is a positive,” Stacey continued, noting that despite some periods of strength, the overall trend for the US dollar has been downward for the last several years. “If the US dollar decreases versus the rest of the world’s currencies, that’s positive for commodities.”

2. Inflation is generating negative real yields

Moving on to his second point, Stacey spoke about inflation, saying that while it isn’t “overly high,” it is now high enough to generate negative real yields, which are positive for gold.

“Any time the real yield turns negative and inflation is greater than the yield that’s being posted, you’ll notice that gold has a nice move up,” he explained to listeners. “You can see it in the most recent period, where we’ve seen gold move higher as real yields have moved lower — and so that is a benefit to gold.”

3. The Fed’s balance sheet is rising dramatically

Finally, Stacey commented on the US Federal Reserve’s rapidly increasing balance sheet.

“Obviously they’re increasing money supply (with the hope that it will eventually) cause inflation. But it also means that there’s concerns about currencies in general, and that should cause the US dollar to decrease as well.” As mentioned, falls in the US dollar tend to be positive for commodities like gold.

The opportunity for investors

According to Stacey, gold and gold stocks are already starting to reap the benefits of these macro environment developments — as evidenced by the growth they’ve started to see.

Displaying a chart showing gold and gold stocks compared to US equities, he noted that while US equities have performed better “for the last number of years,” more recently gold and gold stocks have started to take the lead. And in his opinion, this is only the beginning of the yellow metal’s rise.

“Despite the move in gold and gold stocks more recently, it is still very early on when you compare back in history,” he said. “Back the last time that we saw gold and gold stocks rally — back in ’02 all the way up to 2011 — (gold had) a 500 percent 10 year rolling return. Right now we are at about 40 percent.”

Asset allocation is changing, diversify with gold

Encouraging investors to take advantage of gold’s potential, Stacey said he thinks that the traditional portfolio asset allocation is changing — where portfolios typically used to be made up of equities and fixed-income investments, now there’s a case to be made for including alternatives like gold as well.

“As we go forward, I think both equities and fixed income are going to have a more difficult time in generating the returns they have in the past,” he said.

“So we need to add some diversification to our portfolio. Something that’s going to help us at times when we have a market correction.” He believes gold and gold stocks can serve that purpose.

“Pre-2016, you’ll notice when the S&P 500 (INDEXSP:.INX) went down, gold and gold stocks went down as well,” Stacey explained. But during the last number of S&P 500 corrections, gold and gold stocks have provided a hedge and generated positive returns.

“That’s important because if you can have something in your portfolio that generates positive returns in down markets, you can protect your capital — you smooth out your returns and you get what we call a better risk-adjusted return.”

Choosing between gold and gold stocks

As a final note, Stacey touched on the question of whether it’s better to invest in gold or gold stocks. In short, he said that while they can both provide downside protection, they do move differently — that means it’s a good idea to have exposure to both,

Speaking specifically about gold stocks, Stacey said one of the reasons they are now being considered more seriously as a portfolio diversifier is that miners have “shifted from exploration to execution.”

“As gold companies have recognized that they need to be more capital-efficient … you’ve seen a transition from less on exploration and more to later stage, and also on the operations they have and how can they be more efficient in those operations,” said Stacey.

“That’s a big benefit to investors because what has happened is we’re starting to see the fundamentals of gold stocks improve, and that makes it easier for investors to invest in gold.” Among other things, he said miners are now executing on growth, improving their margins and beating earnings expectations.

He did note that this strategy is likely to lead to fewer gold discoveries and therefore less production, a concern that is often raised in the gold space. “But for investors what it does is it increases profitability overall,” Stacey said, adding that gold miners are now also more able to give money back to investors in the form of dividends; they are also less volatile, which is another plus for investors.

“When you put it together — the fact that the fundamentals are improving, that it’s a different asset allocation — we can now consider investments like gold and gold stocks in a portfolio, and the benefits that they’ve always had are more important than they ever have been in today’s environment.”

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.