Gold Stocks 2018 Could Be the Place to Invest for the Next Five Years
Investing in gold has always been, and will forever be, about timing. That doesn’t mean gold shouldn’t always be held in some form as insurance. But, about 15% of the time, the big capital gains that gold delivers require the proper entry point. Failure to meet that objective means sitting in dead money (or worse). The good news for gold investors is that we’re nearing that 15% window. There are several compelling reasons why gold stocks 2018 will be the place to invest.
If you think you’ve heard similar glorified optimism before, you probably have. But the difference is, this analysis is based on where the economy could go, instead of where it is already. That’s where most gold pundits go wrong. They talk about today’s known fundamentals like they matter.
In reality, they don’t matter much. The market already knows that production is declining, COMEX stocks are low, several key central banks are adding to record stockpiles… Any major factor floated in today’s news cycle has already been accounted for. Yet, gold prices languish in the middle of a five-year consolidation pattern. Yawn.
The key to getting the gold market forecast right is by accurately predicting what the real drivers of the gold market will do. That really means monetary inflation. From 2009–2011, it was concern about government spending, fiscal deficits, quantitative easing, and monetary debasement that drove gold to record highs. Worries about spiraling inflation and a careening dollar from an unrestrained printing press ran high. The U.S. Dollar Index actually traded at an all-time low in July 2011.
Although the structural problems remain, an exploding stock market, a return to growth (however tepid), and a rising U.S. dollar gradually melted away gold demand. Prices pared back in the range we see today.
While no period is alike, the conditions that drive the gold price could be returning. Mainly, that’s a fear of an inflationary surge and corresponding dollar weakness.
We must remember that we’re living in a fiscal world that has never been so insane. Up until 2014, the Federal Reserve was purchasing an unprecedented $85.0 billion worth of government bonds or other financial assets to stimulate the economy every month. When the Fed ended its quantitative easing program, the European Central Bank (ECB) started printing $80.0 billion euros/month to purchase similar assets. Around the same time, the Bank of Japan also started printing $6.8 trillion yen/month to bolster its economy. And on it goes…
With central banks around the world printing so much money, is it any wonder why volatility is at record lows? As copious amounts of capital get re-invested in stock markets, everyone has lost sight of gold. Not only are equities producing double-digit quarterly returns, volatility (fear) is completely absent. It’s like that long-lost uncle you forgot about until he arrives on your doorstep come Thanksgiving. Gold hasn’t lost its importance; it has only lost investor focus.
Bitcoin, to some degree, has a hand in this. But that’s a topic for another day.
3 Compelling Reason to Invest in Gold Stocks 2018
If it’s true that gold has lost its raison d’être from a capital gains perspective, how does it get its mojo back? What makes 2018 any different from 2013 or 2016? In my estimation, it will be the return of inflationary pressures through higher bond yields.
If gold is nothing else, it’s two things: 1) the greatest monetary inflationary hedge the world has ever known; and 2) a stellar protector of when economic uncertainty is high. If our forecast is correct, and the central banks will start trimming their balance sheets, both of these elements will come into play once again.
Reason #1: Bond Yields Will Soar Once Again
The stock market valuation bubble is impressive. But it’s nothing compared to the 35-year-old bond market bubble. Ten-year government bond yields have tumbled from 15.82% in 1981 to below two percent last year (2.3% currently). The grind lower has been continuous, with every rally getting rejected at the upper end of the trend line.
Ever since the U.S. Housing Bubble, central banks have become active participants in the bond market. They’ve been buying everything in sight, pushing yields ever lower, with the hopes of stimulating demand through low interest rates. Many would argue that this participation was key to averting a crisis, but now they’ve become the entire market!
Don’t believe this? Consider how yields on the 10-year Japanese government bonds remained flat for seven straight sessions recently while the Bank of Japan continued its efforts to keep the low end down. No one is trading until the central bank provides guidance. (Source: “Japan’s Bond Market Grinds To A Halt: “We’ll Go Days When No Bonds Trade Hands,” Zero Hedge, June 25, 2017.)
Yields are so low that private investment activity is also low. Who in their right mind would invest principle for 10 years at 2.30% when the Fed’s inflation target is two percent? Over in Europe, the benchmark 10-year German Bund is currently yielding 0.545%, with an ECB inflation target at two percent. Who in their right mind would invest in that guaranteed loser right off the bat?
So prices make no sense whatsoever, but that’s only half the story. The acceleration fluid will be poured on when central banks (ECB and the Fed) actively taper or reduce their bond purchases in the fall. The Fed is engaging in so-called Quantitative Tightening (QT), or the act of allowing Treasuring securities to roll off their balance sheet. This will add to the already growing supply of debt, which is increasing 31% year-over-year. When supply increases even more rapidly, who’s left to buy at the artificially low prices?
The short answer: Nobody. Not unless bond yields go much higher. If that happens, the economy is wrecked and real interest rates will plunge.
Reason #2: Safe-Haven Premium Will Come in Focus Again
When central banks start withdrawing support from the bond market, rates will rise and absolute chaos will ensue. The economy will easily enter a recession as consumer demand craters. Corporate earnings will plummet, sending equity prices crashing lower. And let’s not forget, hundreds of trillions of dollars in credit default swap bets have been placed in expectation that rates will never rise. This is just a short sample of black swan risks that the market faces if the Fed loses control of its interest rate manipulation.
After eight years of market serenity through credit injections, the end is near. The premise here is that higher rates will cause a myriad of consequences that will make gold’s risk premium shine again. Even if the Fed reverses course on its so-called QT initiative, the reflation of its balance sheet (similar to the 2009–2011 period) is sure to propel gold prices much higher.
This speaks nothing of the geopolitical risk that could filter back into play. The war drums in North Korea are beating. This involves China by proxy. The Middle East is a powder keg. Yes, this hasn’t moved the needle much with gold prices in the recent past, but the risk premium will return when it rises above a certain threshold.
That threshold is building.
Reason #3: The Coming Currency Crisis
It’s hard to believe that central banks still enjoy the credibility they do. But, if the economy craters and they lose control of the money supply, all bets are off. That will be the a-ha moment when investors realize that the Fed doesn’t really know what it’s doing, and that the economic “prosperity” seen in recent times was all a mirage. That’s when investors will pile into gold, as they look to exit a careening stock market. Investors will understand that the Fed no longer has their back.
The coming currency crisis won’t necessarily be with the major currency pairs (i.e. U.S. dollar vs. Swiss franc). It will be major currencies vs. gold. The monetary unwind will send shock waves throughout the currency markets as debt Ponzi schemes come crashing down. Not just in America, mind you, but possibly also the eurozone, Japan, and China.
Again, it’s possible that central banks may attempt to stem the damage through monetary easing once again. But if that happens, conditions will be similar to the 2009–2011 period, when monetary debauchery caused gold to spike to new highs. In fact, it will be more powerful, since more stimulus will be needed to produce a similar result.
Gold Stocks to Consider in 2018
The best gold stocks for 2018 are the usual suspects: high-quality, liquid, producing (or near-producing) miners with ample, low-cost mineable resources. The junior and mid-major mining stocks are most leveraged to the price of gold, and investors can round out portfolios with a basket of high-quality ETFs.
An ETF basket of top gold stocks is readily available. For global exposure, iShares MSCI Global Gold Miners ETF (BMV:RING) could be a good option. For more leveraged and shorter-term investments, Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JNUG) might be interesting when gold prices really start moving. As always, spread out your risk accordingly. Gold stocks today offer a variety of choices, both individual equities and ETFs. There’s no reason why any portfolio should lack suitable diversification.
Gold Stocks List 2018: ETFs
These ETFs are assembled in order of their current popularity in the marketplace.
|GLD||SPDR Gold Trust (ETF)|
|IAU||iShares Gold Trust(ETF)|
|DGL||PowerShares DB Gold Fund (ETF)|
|OUNZ||Merk Gold Trust|
|SGOL||ETFS Gold Trust|
Leveraged Gold ETFs
|UGLD||Credit Suisse AG – VelocityShares 3x Long Gold ETN|
|UGL||ProShares Ultra Gold (ETF)|
|NUGT||Direxion Shares Exchange Traded Fund Trust|
|JNUG||Direxion Shares Exchange Traded Fund Trust|
|DGP||DB Gold Double Long ETN|
Leveraged & Non-Leveraged Inverse Gold ETFs
|DZZ||DB Gold Double Short ETN|
|DGLD||Credit Suisse AG – VelocityShares 3x Inverse Gold ETN|
|GLL||ProShares UltraShort Gold (ETF)|
|DGZ||DB Gold Short ETN|
|GDX||Market Vectors Gold Miners ETF|
(Source: “Gold ETF List,” ETF Database, last accessed August 1, 2017.)