Gold can be a controversial investment topic; people often assume you are a goldbug (a perma bull on gold) when you are optimistic about its investment potential. We are not goldbugs but recognize gold as an asset with the potential to add value to an investor’s portfolio at certain times in the economic cycle. Gold has acted as a store of value for thousands of years; as an inflation hedge and safe haven in tumultuous times. From a trend follower’s perspective, gold is potentially setting up for an explosive move higher.
From 1984 thru 2004, gold was stuck in a trading range between $250 and $500 per troy ounce. The US equity bull market was raging, gold was a relic of a bygone era and investors felt diversified owning Sun Microsystems, JDS Uniphase and Pets.com.
Following the dot com bust, the 9/11 terrorist attacks and accounting scandals, gold awoke from its nearly two-decade slumber. The Federal Reserve cut interest rates in the new millennium to soften the blow of the recession that followed the tech bubble and gold began to rise. The precious metal broke out of its trading range at the end of 2005 and rose steadily into the first quarter of 2008 cresting at over $1,000 per ounce. Then followed the Global Financial Crisis and, like many assets, gold declined over the next year as investors clamored for liquidity.
In the 4th quarter of 2009, gold broke above $1,000 and nearly doubled again over the next two years. It peaked in September 2011 at $1,900 an ounce, an all-time high price. Gold had advanced nearly fourfold in six years. While as a society we are taught to buy items “on sale” or at a discount, in markets the most powerful moves often occur when assets reach new all-time high prices. At new highs, all holders of the underlying asset are at a profit and have little urgency to sell. The underlying conditions that led to the supply/demand imbalance can become self-reinforcing as a fear of missing out or greed takes over. In addition, buying assets at new highs is a challenging psychological endeavor because it flies in the face of perceived common sense.
Gold sold off sharply following its peak in 2011. From 2013 to 2019, the precious metal was once again stuck in a trading range this time between $1,050 and $1,400. In mid-2019, the trend in gold changed as it broke above $1,400 and has not looked back.
Gold is currently approaching $1,800, a major area of resistance. If it can break thru $1,800, we may once again see a considerable opportunity if it were to eclipse its previous $1,900 peak.
One can speculate as to what is driving gold now: unprecedented central bank liquidity, economic uncertainty, or waning confidence in fiat currencies. As trend followers, the reasons why assets are rising and falling is secondary to the underlying price action. By the time the reasons are obvious, the opportunity may have run its course. Many investors dislike gold because there is no income component. We would agree that owning gold all of the time is unnecessary and a drag on long-term investment returns. However, incorporating strategies as a component of an investment portfolio that systematically and opportunistically participate in the rising and falling trends of assets like gold can deliver true diversification and uncorrelated return streams when investors need it most.
