Spot gold hit an all-time high today to close at $1991.40 an ounce. In July gold rose 11%, the most since 2012. And now even investors and traders who never own gold are looking at the metal and say, “Should I buy? Will it rally some more?”
In my opinion it’s late to jump on the band wagon. Gold isn’t about to correct, at least not in the short term, but the big driver for higher gold prices–the weak U.S. dollar–looks closer to a reversal than to another extended move lower. For the near term, I’d look to be a seller with an eye toward buying when the dollar has played out a limited upward move.
Frequently gold moves higher on fears to run away inflation. Not this time. Look under any rock you want, there is no meaningful inflation right now or in the near term future.
Instead the driver for higher gold prices has been turmoil in the United States, a U.S. economy in recession because of the coronavirus pandemic, a fumbling U.S. plan (Okay, what plan?) and a weak dollar.
Last week the yield on 10-year Treasury Inflation Protected Securities (TIPS) dropped to below minus 1% for the first time since these inflation-protected Treasury bonds have been issued. In other words if you take the yield on the regular 10-year Treasury (0.55%) and subtract the low but still existent inflation rate, the real yield is well below 0%. Today the yield on the 10-year TIPS fell to -1.03%. That’s a 1.22 percentage point drop in a year.
That yield is hardly a vote of confidence in the U.S. economy. Yes, Treasuries are supposed to be a safe haven in times of volatility, but Treasury yields also reflect a forecast on future inflation and future economic growth. Right now those negative real yields are saying, No growth and therefore no inflation.
Which leaves gold and its big rally resting on fears of economic and political turmoil and a longing for a store of value as the U.S. dollar drops.
And why has the dollar been so weak in June and July? Because looking at the relative performance of Europe and the United States on getting the coronavirus down to levels where it can be traced and outbreaks identified and controlled, the U.S has lagged so badly that it now looks like the U.S. economy may be headed back into a worst case return to shutdown.
In other words, things may not be great with European economies–the drop in GDP in France, for example, during the second quarter was worse than in the United States–but it is possible to see a restrained recovery in the European Union earlier than for the U.S. economy.
It’s important to note that the June and July weakness in the dollar has been a result of weakness against currencies such as the euro and not against emerging market currencies from countries battling their own out-of-control pandemics.
How long does this relative weakness of the dollar against the euro persist? Well, if Congress can pass another coronavirus stimulus package, it would help reduce the gap between the prospects for the European and U.S. economies. The closer we get to a vaccine–or the louder the rumors of a vaccine success get–the smaller the gap and the stronger the dollar.
In the short term I think we’re likely to see a stronger dollar against other developed country currencies and a limited pull back in gold.
That strengthening of the dollar and the pull back in gold isn’t likely to last all that long–the pre-election period in the United States is likely to see repeated outbreaks of turmoil–but I wouldn’t be surprised to see the gold rally stall here and the dollar move somewhat higher. And there is no sign of a national plan that might bring the coronavirus pandemic under control. (If I can use testing as an example–I got a coronavirus test here in New York City, which theoretically has a robust testing program, two weeks ago today. Do I have to tell you that I’m still waiting for the results. Which will essentially worthless when they do arrive.)
If you’ve added significant gold to your portfolios over the last few months, you don’t need to do anything right now although I’d advise looking through your positions with an eye to taking some profits and lightning up in gold in hope of rebuilding those positions at a lower basis price not all that far down the road.
If you haven’t built much in the way of a gold position recently, I’d hold off on starting one now and wait until gold has pulled back a bit or gone sideways for a while.
It’s never good to rush to jump on a trend that looks to be peaking and over pay for an asset that you could buy at a lower price in not all that many days.
