If you think gold is always a haven financial asset, think again.
It crashed in the 2008 financial crisis along with everything else. And it lost about three-quarters of its purchasing value during the 1980s and 1990s.
But it’s acting like a haven now.
Bullion prices surged Monday, while everything else fell apart, rising 1.5% to a fresh six-year high. Gold is proving the hot asset of the trade battle between Donald Trump and China.
Gold has now risen a hefty 17% since the moment last December when Trump warned: “I am a Tariff Man.”
During that time it’s left a lot of other popular investments trailing in the dust. It’s beaten the S&P 500 (SPX) stock index by a hefty 15 percentage points, include three on Monday. It’s crushed popular investments like Apple, Alphabet and Netflix. It’s beaten Tesla by 53 percentage points.
Sorry, Elon. But right now your dreams of reinventing the future are proving less exciting to Wall Street than a boring, shiny metal that people used as currency in the Old Testament.
Gold is up because the Chinese currency is down. Beijing just let the yuan drop to its lowest levels since 2008 as retaliation for Trump’s last set of tariffs. A lower yuan makes Chinese exports cheaper in America, somewhat offsetting the cost of the extra tariffs. It also makes U.S. exports more expensive in China. Beijing also slashed future imports of U.S. foodstuffs. Bad news for Trump-supporting U.S. farmers — or, more accurately, for the long-suffering blue-state taxpayers who will have to bail them out yet again.
Gold is up because no one now knows if the U.S. currency is going to follow suit. Last week, Trump’s chief economic adviser, Larry “King Dollar” Kudlow, ruled out intervention in the currency markets to drive down the dollar. He was speaking only a few days after his boss said the exact opposite — namely that intervention to drive down the dollar was very much on the table.
It doesn’t exactly inspire confidence.
Gold is also up because European government bond yields are now so low that when you keep your money in cash, you actually have to pay people to lend them money.
Oh, and gold is also up because nobody knows what’s going to happen to the euro and the British pound if Britain crashes out of the European Union in a “hard,” no-deal Brexit. And that outcome, notwithstanding my previous hopes, is now starting to look more and more possible. After three weeks in Britain talking to political insiders there, I am now much less optimistic than I was. I still think there’s investment value in sterling and in many London-listed stocks. But I am much more worried about the risks of a Brexit panic in the next couple of months. New British Prime Minister Boris Johnson seems to be gambling heavily that a breach with the EU will help him politically more than it will hurt the economy.
“Everybody wants a lower currency,” says Josh Strauss, money manager at Appleseed Capital and a long-term gold investor. “If that’s the case, and they’re not making more gold, it’s the place to be.”
Wall Street, including the Wall Street media, usually only pay attention to gold once it’s already risen. But if you’re looking for straightforward answers, no one has them.
What is gold really worth? How high could it go? Is it too late to buy now? Should you own it long-term?
Nobody actually has any answers to these questions. If they did, we’d all be rich. It takes two points of view to make a market. There are perfectly rational arguments claiming gold bullion, currently $1,445 an ounce, should really be about half that, or many times higher.
But if gold is in a bull market, one trading signal strongly suggests this has plenty of room to run. Bullion broke above its 200-day moving average last December and has remained there. Historically, this has been a good sign that a bull market is still running for many financial assets, such as stocks. And it “works great” for gold, too, says financial expert and money manager Meb Faber, author of research on moving averages as market-timing signals.
In other words, history says: Own gold when it’s above its 200-day trading average. Avoid it when it’s below. And right now, it’s above it. Numbers from FactSet say that since the mid-1970s, when modern gold trading really took off, this strategy would have dramatically increased your profits and reduced your risks.
There are, naturally, no guarantees that will be the same in the future.
When it comes to trading, many may be reluctant to buy into an asset like gold after it’s already risen.
But does this feel like market top for gold? Is there any euphoria? Are the airwaves full of “I told you so’s” by gold bugs? Is it the financial topic of the day? And are the trends behind it — from Trump to China to Brexit — running out?