Recently, I had an interesting conversation with my friend about the current situation surrounding gold prices. He argued gold investments were a drain on your capital; I argued that gold is the next big trade.
My Friend’s Bearish Gold Outlook
“How can you be so bullish on gold?” asked a friend of mine I met with over the weekend. He argued, “There’s no inflation whatsoever, interest rates in the U.S. are about to go higher, and the global economy is in ruins—major economic hubs are struggling.”
“Gold prices,” he said “do horrible during these situations.”
Let me give you a little background: My friend works for one of the biggest banks in Canada. He is one of the few people I know who were buying stocks back in February and March of 2009. It was interesting to hear his take on the yellow metal.
He asked me, “Why would you care about something that’s been losing money?”
Well, to answer his question, I have to break down his argument.
Gold Outlook Argument #1: No Inflation?
I certainly agree with my friend that there’s no inflation at the moment. The Bureau of Labor Statistics said that in the three months ending in January, prices in the U.S. economy declined by 1.3%, meaning there was deflation. (Source: Bureau of Labor Statistics web site, last accessed March 16, 2015.)
When I say I am bullish on gold, I’m not referring to how I feel it will do tomorrow. I am looking at the precious metal five years from now. Surely, inflation isn’t a problem right now; this may very well remain the case in the short-term. In the long-run, however, I don’t doubt for a second that inflation will be a problem for the U.S. and everywhere else. And this will be great for gold.
“Have you looked at the amount of money central banks have printed over just the last five or six years?” I asked. “It’s not just the Federal Reserve, I really have to think hard to recall which central banks haven’t printed in the past few years. There are very few of them.”
When it comes to money printing, investors need to remember just one thing: the more of something there is, the lesser its value becomes. This is basic economics. An elevated money supply will result in higher prices—inflation.
Gold Outlook Argument #2: Higher Interest Rates Ahead?
Still a little skeptical, my friend asked, “You know the Federal Reserve is expected to raise interest rates later this year, right? And that’s why investors are selling gold.”
I believe that at times, investors are very shortsighted; they forget to pay attention to the bigger picture. Yes, the Federal Reserve is expected to raise interest rates, but I question if it really will this year. (And if it does, it won’t be that significant.)
Also, there are only two central banks—the Federal Reserve and the Bank of England—that are talking about an interest rate hike. Since just the beginning of this year, a huge number of central banks have lowered their benchmark interest rates. Almost each week since the start of 2015, I have heard about some central bank lowering its interest rates or implementing some other easy monetary policy tool.
Lower interest rates are great for gold. They were one of the biggest factors that started the bull market in 2002.
Gold Outlook Argument #3: Global Economy In a Slump
“What about the global economy? It’s in trouble. Don’t the recessionary pressures impact gold prices significantly?” my friend asked.
He added, “Just look back at what happened to the precious metal’s price back in 2008. Gold prices went from $1,000 to below $700.00, all because of the global economy and the U.S. economy slowing down.”
I asked, “Do you not remember what happened right after the decline?”
Following the decline, the price of gold moved significantly higher. In 2008, investors were worried about a global economic slowdown, but extended economic scrutiny made the situation uncertain. As troubles in the global economy continue, I expect the uncertainty to increase, allowing gold to shine.
Is It Delusional to Think Gold Is the Next Big Trade?
I am looking at gold as the next big trade that no one wants to pay attention to—for now. In 2009, nobody wanted to buy stocks. Those who bought them then are still reaping the rewards six years later. And I’m betting those who didn’t pay attention to stocks then regret it now. I think the same will happen in gold.
I understand there’s scrutiny and I will not be surprised to see the metal’s prices decline further. My friend isn’t the only person who believes gold is not worth it—this opinion prevails across the board and as a result, these individuals will sell gold.
At this point, I believe that investors should, at the very least, be paying attention to gold and gold-related investments. They are presenting a great opportunity. The slump in gold prices over the past few years has taught the sector a very tough lesson. As I see it, if the market turns, profits will be much higher this time around.