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Gold Suffered a Weak First Half – but the Second Half is Gold’s “Sweet Spot”
At the end of the first half of 2015, we see a lot of minus signs in the precious metals price charts. For the first half of 2015, gold was down 2.35% to $1171 per ounce. Silver was down 1.7% to $15.70, and platinum was off a stunning 10.9% to $1078. However, the stock market didn’t do very well, either.
The S&P 500 was virtually flat – it fell 0.26% in the second quarter and gained 0.17% for the first half. Fixed-income investments (primarily bonds) were in the red: Long-term Treasury bonds were down 6.66% for the first half of 2015, including a 10% decline in the second quarter. (When the yields on long-term bonds rise, the price of the bond falls, and Treasury bond yields have been rising sharply recently.)
While the stock market and gold have been disappointing, they were better investments than bonds. Still, gold and the stock market were both quite boring. There were no steep declines or rallies in either market in the first half. In fact, the stock market never rose or fell more than 3.5% in the first half, which has not happened in the modern history of the stock market. Some wags are calling 2015 the “Year of the Sloth.”
But gold investors can take heart that the second half usually outshines the first half. According to a new report by Bank of America Merrill Lynch, in 25 of the last 27 years, gold rallied in the second half, thanks in part to the Indian festival and wedding seasons, when gold jewelry fabrication is an important industry supporting gift-giving in India. During these summer-to-fall rallies, gold has gained an average of 14.9%.
The stock market has an opposite cycle. Historically, most gains come from November through April, with August, September and October being some of the most dangerous months for stocks. While we don’t anticipate a major stock market crash this year – for a variety of reasons – the main lesson to draw from history is that investors can benefit greatly from asset allocation and diversification for safety.
Over Time, Stocks beat Gold and Gold Beats Bonds
A wise investor will diversify into stocks and bonds, along with some cash and gold, treating gold as a profitable alternative for T-bills, bank CDs and other cash-like investments. New York University’s Stern School of Business outlines the virtues of diversification with a table of the long-term value of the S&P 500 (as a proxy for the stock market) vs. short-term Treasury bills and longer-term Treasury bonds.
We added gold to the list so that you can compare their performances over the last 10 years, the last 50 years and the 87 years since the Federal Reserve began keeping data on these markets. The percentages below are geometric averages, meaning that this is the compounded rate of return for each investment.
Translating some of these numbers, you can see that Treasury bonds and gold have performed about the same (4.8% vs. 5.0%) since 1928. Stocks were the clear leaders over the last 50 years and 87 years and gold is #1 since 2005. However, those are averages and there some wide swings in each category. If you compound the average gains in all categories since 1965, they begin to represent some significant gains:
The S&P 500 (with dividends invested) has gained 10,815% from the end of 1964 to the end of 2014. A $1,000 investment in that index became $109,150. Gold gained 3,329% in the same 50 years, so $1,000 became $34,285. A similar investment in Treasury bonds delivered $25,600 and T-bills brought $11,413.
So why not invest in stocks and forget about the others? Because stocks had long periods of net decline, from 1929 to 1942, 1966 to 1982 and 2000 to 2009. Bonds declined in the 1970s but have been strong since 1981. Gold was strong in the 1970s and 2000s. One investment can “zig” while the others “zag.”
We can’t advise investors about percentages, but if stocks represent the lion’s share (say 50% to 60%), and bonds are 20% to 30%, then T-bills and Gold can represent about 10% each for a balanced allocation.
As you can see, gold is the big winner in the last decade. Despite gold’s decline since late 2011, its meteoric rise from 2001 to 2011 delivered far more gains than the stock market – which suffered its own “lost decade” from 2000 to 2009. Gold is still feeding off the huge advantage it enjoyed in that decade.
Getting into the specifics, gold enjoyed 12 straight positive years from 2001 to 2012 before suffering a big decline in 2013 and smaller declines in 2014 and early 2015. However, if you start the performance clock at the dawn of Y2K – the start of the new Millennium – gold has clearly outperformed stocks:
Comparative Price Performance since December 31, 1999
So, despite its recent weakness, gold has outgained the S&P 500 about 7.5-to-1 in the new Millennium.
The U.S. Dollar is the Biggest Factor in Gold’s Future Gains
The biggest game changer for gold in the last four years is a stronger dollar. At first the dollar gains were slow, then the dollar soared over the last 12 months. Gold, like most commodities, is universally priced in U.S. dollars, so gold’s price in dollar terms has been weak over the last year. In euro terms, however, gold is up in the last 12 months. Gold is also up in terms of many other currencies, but not the U.S. dollar.
The dollar will eventually fall and, when it does, gold is likely to recover strongly in U.S. dollar terms. When the dollar fell sharply to the Swiss franc and German Mark in the 1970s, gold shot up from $35 to $850. This happened again from 2001 to 2011, when gold rose 7-fold while the U.S. dollar weakened.
Since gold is rising in other currencies, demand is picking up in those countries. The World Gold Council (WGC) said that Germany bought 20% more gold coins and bars in the first quarter of 2015 than they did in the first quarter of 2014. European investment gold demand rose 16% in the first quarter, due to gold’s rising price in euro terms and the negative (or very low) interest rates offered by many European banks.
Gold is virtually soaring in terms of the weakest currencies – like the Russian ruble – so the Russian central bank has been loading up on gold faster than any other nation in recent months. The central bank of Russia bought 77 tons in 2013 and 150 tons in 2014 and is on pace for even more gold buying in 2015.
China and India account for about half of the global demand for gold each year, but they have different fundamentals so far this year. In the first quarter of 2015, Chinese demand was 273 metric tons of gold (32% of global demand) while India’s demand was decidedly lower, at 192 tons (22.5%). The next nation in line was Germany with only 4% of global demand, so China and India accounted for 54.5% of demand.
In the second quarter, these numbers have trended in the opposite direction, as Chinese investors jumped on a stock mania, which has imploded recently. In time, the Chinese will return to gold as a safe haven, but for now Indian demand is rising faster than Chinese demand, due primarily to the relaxation of some stringent Indian regulations against importing gold. With pent-up demand in India, entering the wedding season, we are liable to see a close race between China and India for being #1 in gold demand in 2015.
U.S. investors also seem to be returning to gold. In the week ending June 25, investors added 6.9 metric tons of gold (via gold-backed exchange traded funds), the most of any week since February 2, according to Bloomberg. As of June 25, assets in gold ETFs had risen in seven of the previous eight days, rising from their lowest level since 2009. Purchases were prompted by “continued worries related to Greece and investors returning to ETFs,” according to Ole Hansen, head of commodity strategy at Saxo Bank.
Buying gold or silver is like buying any other investment. It pays to use a discount broker, and Navellier Gold is the premier low-cost source for a variety of gold, silver and platinum coins and bars. Gold should be part of most well-balanced portfolios, as a multi-purpose hedge. Stocks should probably be the largest component in most portfolios, followed by bonds and then gold or silver, as an alternative to cash or CDs.
Disclaimer: The information in this letter is not intended to be personalized recommendations to buy, hold or sell investments. This should not be considered as personalized trading or investment advice to subscribers. The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication. Subscribers should verify all claims and do their own research before investing in any investment referenced in this publication. Investing in securities and other investments, such as options and commodities, bullion and futures is speculative and carries a high degree of risk. Subscribers may lose money trading and investing in such instruments.