Don Coxe famously quipped, “never invest on the basis of a story on Page one, invest on the basis of a story that’s on Page 16─that’s on its way to Page one.” His rationale is simple. The story that’s already made its way to the front page and is top of the headlines is well known and priced into the market. In investing, sometimes you must be ahead of the curve. With the attention that precious metals seem to be getting in the press lately, they are looking more and more like the story heading to page one.
Bridgewater Associates’ Co-Chief Investment Officer made headlines a couple of weeks back in an interview with the Financial Times, where he discussed the prospects for gold. I think they are simple, concise, and justified. They illustrate why the average investor would want exposure to precious metals in their portfolio.
The first is regarding the outlook for central bank easing. Over the last year 49 central banks cut interest rates 71 times. Furthermore, it was the highest proportion of central banks cutting rates in the last decade. Forecasts are for the theme of central bank easing to continue into 2020. Discussions have shifted to how hot the US Federal Reserve will allow inflation to run before they even consider raising rates again, and this is as policy debates have surrounded the evolving role of monetary policy and its limited efficacy in a near-zero interest rate environment. Ultimately, it’s the expectation of further rate cuts that’s supportive of precious metal prices, and like the financial crisis, gold biggest moves were on expectation of policy changes versus when they came to fruition.
The second bullish point for metals is ballooning fiscal deficits. In the United States the federal deficit tracked over a trillion dollars for the first time since 2012. Similarly, in other Western nations there seems to be less concern over government frugality in favor of spending programs to spur economic activity. Long gone are the days in 2011 when a debt rating warning from Standard and Poor’s over the creditworthiness of the US government spooked markets. Earlier in the last decade was the concern of a debt overhang and a nations inability to be able to borrow because of fiscal imbalances. Thus, the case for precious metals is made with increased uncertainty from renewed focus to growing government debt.
Finally, the case for precious metals can be made as a diversification from the US dollar. There are a couple angles to this scenario as gold historically has had an inverse relationship to the world’s reserve currency, whether the US dollar at present time, or the British Pound before it. Last year, the US equity indices exhibited their attractiveness to foreign investors marking their best returns since 2013. Gold acts as a natural hedge to those increased US dollar holdings, and this case is increased with every weekly record close.
Another view though relates to the unilateral and deglobalized approach to geopolitics from the current US administration. Isolationist policies have the potential to devalue the dollar and its role in global commerce. This has not been a fast-evolving transition, but one that continues to stay forefront in terms of global trends.
This post would be incomplete without addressing some of the risks to precious metals in this year. Front and center would be renewed global growth and a halt to the accommodative policy from the US Fed and their more cautious approach. Rising real interest rates could stand in the face of the continued momentum of the precious metal from the past year also. To backtrack a few years, and reference the Don Coxe quote above, investors’ appetite for and attention to the yellow metal was minimal when growth was advancing, stock markets were gaining, and market and economic risks remained relatively muted.
The difference to today where global growth is expected to pick up, and risk markets are still moving higher is the associate elevated level of risk. Call it a path to an unchartered territory that stems from political unease into an election cycle in the short-term, to the direction of monetary policies ability to influence markets, thus strong cases can be made for investor diversification in precious metals. This is as the trend has the potential to continue with gold’s ability to rally in multiple market scenarios whether its risk-off with the US dollar, or risk-on with the US equity markets.