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Investors are wondering what’s next after the price of gold, considered a safe-haven investment in turbulent times, reached a new high this week.Nacho Doce/Reuters
The good news if you’ve missed out on the spectacular rally in gold: You probably already own a ton of it.
The bad news: Investors now have to figure out what to do next.
The price of gold has been on a ripping rally for the past year. It rose above US$5,000 an ounce on Monday, a record, and remained above that level early on Tuesday. That’s a gain of more than US$2,000 an ounce over the past 12 months alone.
Hmm, what happened about a year ago?
Ah, yes, Donald Trump began his second term as U.S. President. And while his decorative tastes have leaned toward gilded this and gilded that, his economic policies and belligerence toward allies have had a far greater impact.
He has imposed tariffs against trading partners, undermined the independence of the Federal Reserve and berated anyone who fails to support his claims on Greenland.
The value of the U.S. dollar against a basket of global currencies is falling, fears of inflation continue to haunt economists and the future of the North Atlantic Treaty Organization (NATO) is an open question.
More countries, including Canada, are raising their defence budgets, straining debt levels. And some central banks are adding more gold to their reserves.
All of which has underpinned the price of gold as it blasted through US$3,000 an ounce last February, then US$4,000 in October and now US$5,000.
“Bull markets are associated with strong capital flows, and these capital flows are just dwarfing the finite physical supply,” Max Layton, a commodities analyst at Citigroup, said on call this week.
If you own gold either directly or through an exchange-traded fund, congrats! And if you’ve bought the stocks of gold producers before this latest rally kicked in, double-congrats!
But many investors who never bought into gold’s importance have also won big. That’s because gold has propelled the S&P/TSX 60 and the S&P/TSX Composite Index – the building blocks for many Canadian index-tracking ETFs and mutual funds – to record highs over the past year.
The shares of Agnico Eagle Mines Ltd. and Barrick Gold Corp., two of the biggest gold producers on the planet and among the 10 most valuable Canadian-based companies, have been outpacing the price of gold. Rising commodity prices tend to supercharge producer profit margins.
Several smaller producers, which enjoy a greater sensitivity to the price of gold, have performed even better.
If we are all gold investors now, what’s the next move?
There’s a strong case for doing nothing. That is, sit tight and enjoy the ride. Gold is on an epic run, and there are no signs of sputtering. Yet.
Mr. Layton said that there is a case for gold rising to US$6,000 an ounce, if current owners of gold become less willing to sell to buyers, constricting supply.
Gold stocks also look tempting. Analysts at Bank of Nova Scotia on Monday raised their target prices – that is, where the analysts estimate the share prices will be within a year – on Agnico, Barrick and other producers by an average of 40 per cent.
“The equities are cheap versus bullion, with the equities not tracking at the same pace as the gold price and therefore valuations have room to move upward,” the analysts, led by Tanya Jakusconek, said in a note.
Still, for an asset that is supposed to provide shelter from geopolitical and economic risks, gold carries a risk of its own: What happens if the world starts to heal?
The Scotiabank analysts believe that gold will continue to carry a significant risk premium – that extra bit of value above its estimated fair value – as long as Mr. Trump is president.
After that, the world could be a nicer place to live, and certainly more predictable, which could chip away at the case for buying gold. It’s a hot commodity right now, but nothing stays hot forever.
What’s your take on gold? Let me know at [email protected].
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