Gold in 2020, A Smart Move?

Gold is hot right now. However, like any investment in a speculative market there is always risk buying gold, so what makes a “good” buy or position depends on how much risk a person is willing to deal with. Some, for example, who have plenty of time to recover if a loss occurs, might take on a lot of risk. Others who need stability and value protection might not be so liberal in their risk-taking.

Current Market Movement

With risk understood as present part of the investing environment, gold has been and seems to be continuing to be a solid performing asset to have going into 2020. At the beginning of 2019, gold was hovering around $1,286/oz and not quite breaking the $1,300 barrier. Over the last year it reached a top of $1,525/oz, picking up another 18% profit in that one year span. No surprise, there was plenty of profit-taking towards the end of 2019, assuming that 2020 was going to continue the growing economic boom of the years’ past. And then the COVID-19 panic came along and shattered everything calm and orderly. It’s now almost six months later in June 2020, and gold has been working hard as a hedge to a sinking stock market just now trying to get back on its feet again. Pushing up against $1,750/oz in the middle of June, the precious metal has added a 30% gain since the $1,450/oz at the end of December 2019, and it is hovering in the same price range as during the 2011-2013 Recession period if one looks at a 10-year chart and related price history. Clearly, gold has been performing quite well as a value protection from shaky economies practically shut down in some sectors due the current pandemic. All of the above begs the question so much more now whether gold will remain strong through the rest of 2020 or it if is peaking and reaching a significant sell window through the summer. To answer that question better, one has to look at what’s going on with the overall economic picture which is dramatically in flux right now. 

Are We Going to Have a Recession?

If it’s not clear the world and particularly Europe and the U.S. are in a massive economic slowdown, then one just has to look at the number of people who are unemployed and ask where in the world are they going to find new jobs. The U.S. alone is currently having to address a 13.3% unemployment rate as of May 2020, which is an improvement from the higher figure in April. In rough terms, that’s more than 1 out of every 10 working adults out of work and trying to find a living income. It’s true that the summer tends to improve numbers, but the high majority of those positions employed tend to be seasonal, low wage and disappear in the Fall. The real problem is that jobs with notable income and earning power have disappeared as companies retrenched to offset revenue losses. And some aren’t coming back. More than a few large employers have called it quits entirely, leaving hundreds out of work and unemployed across the country. Governments try to compensate for modern recessions by flooding the markets with artificial stimulus packages. All of the real estate recession tools are coming back, from outright tax refunds directly to individuals to continuing low interest rates for the cost of borrowing to loans and subsidies (tax credits) for businesses to keep operating and maintain employment. However, these cash flow supports are temporary and short-term in nature. Unless a government has a sizable reserve to work with, eventually the constant rate of higher spending beyond normal operations will trigger higher taxation to make up the difference. And that in turn cuts into discretionary spending and hobbles the economy again. So, long-term outside of 2020, an extended recession looks to be very likely. With fewer people working taking care of more people under one roof, there is less spending going around that sustains companies beyond basic need markets like food, health, housing and transportation. With the U.S., for example, so dependent on a consumer market, when people stop spending and hold onto their cash, companies fold left and right, triggering more layoffs. The vicious cycle continues until the market reaches a point of sustainability again. This is only delayed by government stimulus activity, not avoided.

Gold as a Hedge Continues

All of the critical reasons that make gold such a good hedge against an unstable market are in play and valid in 2020. Gold is not controlled by government like a currency; it floats independent based on speculative supply and demand. The only way a government does influence the precious metal market is by unloading a considerable gold sell position from its central banks. And most have already played that card, trading a gold-basis for one on gross domestic product growth. Gold can’t be easily produced in new quantities. The amount of new gold that exists is very limited and enters the market in a very small percentage of the whole. So, the gold that does trade is existing amounts either held as commodities, recycled, or collected. That makes it a contained market and a very stable one in terms of outside influence. Gold is not tied to the political or economic policies of a government, so it does not become useless by inflation, and it does not lose its value crossing a border. In fact, gold is extremely universal in value and probably the most reliable proxy currency to have for trade and payment internationally. All of the above factors resonate loudly in 2020 and continue be serious protections against the erosion of savings and income people are realizing in every industry and walk of life right now.

Market Instability

China, the U.S., and Europe are the main markets today, and the core driver of economic movement continues to be the U.S. for now. In the space of 10 years, the American stock market has moved from the lows of 7,720 to a high peak of almost 28,000 on the Dow now back to 26,000 in June. That is a massive, unrepeated market fluctuation that is greater in volume and value than the entire history of the stock market prior to 2009. And 6,000 points were removed in the space of days and a few weeks when COVID-19 took its toll in March 2020. When that much value and wealth can disappear so quickly in such a short amount of time, investors are extremely smart to hedge part of their wealth into assets that are not so liquid or connected to the same dynamics. For example, in the 1920s, after World War I, a tremendous amount of people suffered in poverty in Europe due to rampant inflation, a lack of work and income opportunity, and government inability to act. However, a small group of Europeans did just fine, held their own, and were extremely comfortable through the period until World War II began. Those folks had one thing in common – they had significant holdings of gold and were able to exchange their assets as needed to maintain comfortable and extremely affordable living. The same folks continued to do just fine during the 1930s as well, even with the stock market crash in the U.S. in 1929. All of this changed, however, in the 1940s as countries had to move their gold to the U.S. to keep it out of the hands of the Russians and Nazis, with a massive amount being parked in the U.S. No surprise, the American economy rocketed after 1945, buoyed by a large foundation of central bank gold. Back to today, the U.S. market is highly unstable and hinged on economic performance only. After President Nixon disconnected the U.S. economy from the gold standard in the early 1970s, the country used its growth engine as the basis for the U.S. dollar’s value and strength. That worked for a while, but eventually by the late 1980s Europe began to catch up and then outpace the dollar with the stronger Euro. And now, China is poised to be a major dilution of the U.S. dollar on international markets, being both packed with resources, a major holder of U.S. debt, and managing a Chinese currency that can be tweaked by the Chinese government as needed versus moving with the market. None of these aspects work in the favor of the U.S. dollar’s strength in 2020 and forward.

But a Weaker Dollars Means More Jobs, Right?

Many critics argue the come-uppance of the global economy is a good thing. In the U.S., for example, by devaluing the dollar American products and services become more affordable internationally which grows our business and export side. That model works well if the U.S. was predominantly a market that provided it’s own needs domestically. However, as most people are aware, just about everything American consumers buy is made overseas and imported in. From Mexico to Asia to China to even Africa, goods and products in the U.S. are made outside its borders. So, a fall in dollar values makes these items more expensive to import, not cheaper to buy. In short, a weaker dollar erodes American buying power on a practical level because of how dependent we are on the global market. And if American companies can’t buy as much, they are definitely not going to employ more and add to operating costs. That drives a new recession that can ripple to other countries that need the U.S. to buy things.

So, Gold Makes Sense Right, but Bullion Physical Gold or ETF Gold Stock?

The idea of electronic gold holdings like those in an exchange-traded fund might seem to make a lot of sense for folks. First, you don’t have to find a gold seller and deal with mark-up pricing on the bullion sold. With an ETF you’re buying shares on a public trading market and the only cost is your trading commission, if it applies. Second, there’s no security issue; your gold “holding” is registered to your brokerage account and there is no physical gold in your household to worry that it might get legs and walk away one night. These both are appealing factors for folks who feel they are busy or don’t want to deal with holding physical gold. However, an ETF share position, or gold stock, is not gold per se. It is a proxy position in someone’s trading fund who has purchased gold as an asset for that fund. You own nothing of the precious metal with ETF shares. This is a very critical difference. If the ETF fund goes belly up (which some mutual funds do from from time to time), there is no recourse. You have no gold coin or bar in your hands to sell and recover with; your money invested is 100 percent gone. Additionally, physical gold is not that hard to secure. You can either place it in a home safe, or you can rent storage space with a reputable gold dealer and storage provider. Both are economical and extremely theft-proof for your bullion. As your position gets bigger, even with the small size of a gold coin, you can adjust accordingly with minimal risk. But most importantly, your gold value is in your hands, not in a paper account. Some of the most popular ETFs have tracked and moved along generally with the value of gold on the international market. The SPDR Gold Shares ETF (GLD), is one of the most popular, with a daily average volume movement of 12.7 million shares. In short, a lot of money is placed in an ETF assumed to retain a commensurate amount of real gold in its fund assets, but the share holders own nothing by a stake in the fund.

Risk. How Bad Could It Be?

Nobody has a perfect crystal ball on what can happen with economic value moving forward. Many who look at the 10-year chart of where gold is right now might feel the market has peaked. Buying in 2020 would be investing right at the top of the market and setting one’s self up for a loss as gold falls back again. Historically, that has happened. However, the precious metal also continues to keep coming back and rising to higher valuations within a few years as well. The “top of the market” argument also assumes the pandemic damage was temporary, minimal, and the economic environment will go right back to where it was. This is a very Pollyanna perspective that doesn’t really have any fundamental statistics or logic to stand on. Multiple corporations and companies have been seriously damaged. Millions have been laid off or furloughed from their income and work. A similar number fundamentally depends on government support that is temporary and likely to run out before the summer is over in 2020. And with delinquent taxes, deferred rent and mortgage payments, and no new income earning jobs in sight, things do not look very rosy in the fall this year. In fact, most government number-crunchers are expected the next two to three years to be painful with tax increases as the primary solution to continue government services. Finally, COVID-19 has not been addressed with a vaccine. As it spreads and makes people sick in greater numbers, more closures will occur worldwide. All of these factors will drag on any economic recovery and make gold extremely valuable as an investment hedge going forward. So, yes, there is risk in gold like any investment. However, the current economic factors are very strong that gold is not likely to see a significant value drop anytime soon. In fact, it’s likely to keep rising and may break the $2,000/oz barrier before 2020 is over.

The Bottom Line

2020 has at least a half year to go, continues to struggle with a pandemic and its disruption in all aspects of life, and major country economies are in jitters or shambles, depending on which one is looked at. Every major indicator is expecting more of the same through the end of the year, as well as continued dependency on gold as a valuable hedge against what is going on. Those who are selling gold are doing so for needed cash to offset losses elsewhere, such as losing income to job loss or similar. So fundamentally, the demand is still healthy and strong. Nobody should put their entire portfolio in gold, but a solid 5 to 10 percent position would be a very strategic and smart play right now going forward. If you're now thinking twice about whether to buy gold in 2020 and you want more information on details on how to buy gold in Auckland, then it's time to talk to our team. We can help you through the fog of the current markets and economic news to focus directly on how to buy gold in 2020 the smart way.