Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

The current geopolitical environment highlights the many reasons gold can thrive in any scenario. It’s a reminder to the attentive investor why gold has been the financial hedge of choice throughout recorded history. Let’s examine how gold compares with other assets when market volatility, recession, geopolitical conflict and inflation are all risks that are either on the horizon, or have already materialized.

Gold vs. “digital gold”

Bitcoin has emerged to prominence for several reasons, not the least of which is its fixed-supply cap. In January, the CPI saw its fastest monthly rise since 1982, exceeding already-pessimistic inflation expectations. Investors and even those who have previously had little to no interest in actively managing their savings are growing wary of currency depreciation. In other words, as time passes, each dollar buys noticeably less. A quick glance makes a fixed-supply asset look very appealing when trillions of dollars are being printed.

Yet, in a recent note, Goldman Sachs’ analysts called bitcoin a “risk-on inflation hedge” and gold a risk-off inflation hedge. The top crypto is, for better or for worse, infamously volatile, having recently shed 50% from its November high. With clear signals of a growth slowdown and worries over a recession, the team views a long gold position as the best way to protect oneself against market downturns. Recent history has indicated that, while bitcoin and other cryptocurrencies have tremendous growth potential, their astonishing volatility is all-too-tightly correlated with speculative, “risk-on” investments. By this measure, bitcoin isn’t a suitable hedge.

Gold as the investment of last resort

It seems that traders are equally concerned and unconcerned about a conflict between Russia and the West, the latter by proxy via Ukraine. Some estimate an only 10% chance of a true shots-fired escalation. Nevertheless, there has been no shortage of scrambling among traders. Any conflict would make riskier investments, such as equities, vulnerable to a market rout. So what are some of the options traders are exploring to cover their bases?

With the cost of defensive assets going up, investors are betting on everything from French and German stocks to safety in the U.S. dollar and the yen. But one hardly needs reminding that the stock market can never really offer protection. And in the face of the highest inflation in decades, is hedging with paper currencies really a good idea?

Roberto Lottici, fund manager at Banca Ifigest in Milan, has minimized both cost and exposure to risk by doubling the gold and silver allocation of his fund to 6%. It’s a percentage many would find conservative even in the absence of huge red flags. Nonetheless, to Lottici, it’s enough to offer peace of mind in whatever scenario unfolds.

“If the situation spirals out of control,” said Lottici, “then it’s going to be one of the very few assets that can offer protection.”

That’s just the thing with gold, though: even if the Russia-Ukraine situation unfolds in the most peaceful manner possible, Lottici won’t regret his precious metals allocation. Just the opposite, as any of the aforementioned risks stands prepared to turn gold from a hedge and into a top performer.

For Gold Investors, the Glass Is Half Full

For Gold Investors, the Glass Is Half Full

As VanEck Portfolio Manager Joe Foster notes, for gold last year was a lot less disappointing than traders might have one believe. One of the best things about long-term investment in sound assets is that there is no urgent need for outperformance. And while we didn’t notch a new all-time high gold price, we got plenty of solid footing and a stage for gold to continue its climb.

Gold’s price trend in context

Perhaps the most important takeaway is that gold’s price averaged $1,250 from 2013 and 2019. In a little over a month, it will be two years since the market crash which redefined the word uncertainty. Despite a somewhat steep fall from its all-time high, gold’s price since the crash has averaged $1,817. That’s a 44% increase based on average prices. We could argue that gold’s price should be higher, given the macroeconomic conditions and ongoing uncertainty, but that’s just speculation.

The fact is that gold’s average price surged since the Covid crash.

Foster notes that gold is at historically high levels even after a year of many factors working against it.

The dollar’s effect on gold’s price

Despite a tidal wave of multi-trillion-dollar stimulus printed in the last two years, the U.S. dollar index ended 2021 up 6.4%. And perhaps because of this stimulus, the year was marked by absolutely manic risk-on investment. Equities, real estate, crypto, junk bonds, leveraged loans, SPACs, the rare whiskey index and cartoon monkey images all skyrocketed in price. This is the so-called “everything bubble,” brought to you by Federal Reserve Chairman Jerome Powell with a combination of massive money-printing and near-zero interest rates that pushed investors desperate for yield into some of the strangest corners of the market (and even invented new ones).

Well, that’s one consequence of the Fed’s actions. The other? Levels of inflation across the board that dwarf anything we’ve seen in the last 40 years. We have to go back to 1984, the tail-end of the Carter-era stagflation episode, to see anything like it.

Here’s what gold has going for it

With gold showing exceptional resilience even in such an inflationary environment, we’d do well to go over some of the things that are working in the metal’s favor. And there’s no untying them from inflation.

Foster urges anyone who thinks that gold missed an inflationary period’s upside to reconsider. There have only been two such stretches in the last 50 years, one in the 1970s and the other between 2003 and 2008. We all know what happened to gold prices after each. Unsurprisingly, both were very much characterized by the same kind of not taking inflation seriously until we have to sentiment that we’re seeing from the Fed today.

Foster thinks we’re witnessing the start of a wage/price spiral that will keep driving prices up (though arguably it’s already well underway). S&P CoreLogic Case-Shiller National Home Price Index rose 18.8% in November (latest figures) year over year. The priciest housing market in history coincides with a lack of job creation, leaving the U.S. with 21 million fewer people employed than before the Covid crash.

Foster points out that inflation-adjusted, average hourly earnings have declined by 2.7% so far this year. In an example of inflation psychology setting in, unions are negotiating to get cost-of-living adjustments (COLAs) written into their wage contracts. All this, and we’re expecting yet another year of spikes in prices of basic goods amid ongoing supply chain disruptions.

What about the Fed’s plan to raise interest rates?

As for policy, the federal government wants to print and spend more money. The Federal Reserve is taking it away. At least, they’ve threatened to take it away…

UBS analyzed the Fed’s previous three rate hiking schedules, those in 1999, 2004 and 2015. As was the case last year, gold pulled back 5%-10% six months before a hike and then gained 10%-20% after each initial hike.

It goes without saying that the fourth hiking schedule could make way for gains beyond even those. So even the most long-term gold investor should find plenty of good news for gold’s price in the year ahead.

Surging Inflation Launches Gold Rocket “To the Moon”

Inflation is the fuel that will send the gold rocket to the moon

The Bureau of Labor Statistics (BLS)’s December 2021 inflation update pushed the cost of living to a nearly 40-year high of 7% after nineteen consecutive months of increases. A far cry from the Federal Reserve’s self-imposed target of 2%.

The bad news is, inflation is most likely headed higher. The most recent Producer Price Index (PPI) report, which tracks cost increases at the manufacturing level, measured 9.7%. The official BLS press release didn’t even try to sugarcoat the news…

the largest calendar-year increase since data were first calculated in 2010.

Gold futures climbed and continue to climb on this double helping of bad news.

As Peter Spina, president and CEO of Goldseek put it,

The most important takeaway for gold here is that gold is a rocket ship and inflation is its fuel. Now with inflation showing itself to be baked into the system and growing recognition of inflation, gold is going to benefit in a big way.

The U.S. dollar fell against most currencies after these reports. It seems as though global traders aren’t really expecting the Federal Reserve to follow through on its 3 predicted price hikes in 2022 (or maybe they’re already priced in?)

Jeff Wright, chief investment officer at Wolfpack Capital, said of Powell’s recent comments,

No fireworks, rather dovish and no surprises. Gold has done well with Powell’s ‘go slow’ management of the Fed.

On the downside, Wright said there’s a possibility that both quantitative tightening and tapering could accelerate, which would stop a gold rally in its tracks.

What are the odds?

Bond king on “recession watch”

Jeffrey Gundlach, the billionaire “Bond King” doesn’t think the Federal Reserve will be able to thread the needle and bring the economy to a soft landing.

Inflationary pressure is building. If we look at the economy, it’s undeniable that’s been supported by the quantitative easing and the Fed’s balance sheet expansion. And since that’s going away, it is just not plausible to think that we don’t have more headwinds in 2022 for risk assets and, ultimately, for the economy. The signals from the bond market are starting to look a little bit like a pre-recessionary period.

Gundlach believes gold is the best asset to hold in periods like this, when inflation consumes so much of our purchasing power and the world’s central banks don’t seem able to contain the chaos.

He’s bullish on gold because he’s bearish on the long-term value of the U.S. dollar. And when dollars shrink in value, it takes more and more of them to buy the same amount of gold. (From this perspective, buying gold early offers a sort of discount…)