Is it Time to Load Up on Gold?

Thoughts from our recent Big Picture podcast, Gold – In Trouble or Ready to Double?, which you can listen to in full at Financial Sense here or on iTunes here.

In the last 15 years, many commodities saw extraordinary gains. Those who invested early in the "commodity supercycle" (as analysts refer to it) did quite well; but, as we all know, bull markets eventually run out—and the commodity sector is no exception. Now with the price of gold—like so many other commodities—down nearly 50%, is now a good time to buy?

In order to understand the future of the commodity space, investors need to understand how we got to where are with markets from gold, to copper, to oil. Jim Puplava, founder of Financial Sense and Chief Investment Strategist at PFS Group, points out how the boom in commodities was driven by unsustainable economic growth, particularly in emerging markets:

“Most of the last decade you saw above average economic growth rates—often driven by an expansion of credit—both here and in the emerging world. Those were the days when we saw the Chinese economy, which later became the second largest in the world, growing at 10-12% a year. It was this economic growth that drove the demand for gold [and most other commodities]. It wasn’t a lot of gloom and doom...that was driving it higher.”

Looking ahead, however, Jim sees a much different situation regarding the future of commodities and precious metals. First off, since about 2011, there has clearly been a shift in economic growth away from the BRIC countries and toward the U.S.—though this will eventually shift back again in the other direction. But the larger theme of the last several years—and one that is not positive for commodities with no yield—has been the success associated with things like dividend-paying stocks and high-yield bonds.

As an investment strategist, Jim's message has been quite clear and consistent for many years: In a zero interest rate world, stocks with strong dividends, or investment-grade bonds with high yields, have provided the necessary income that so many individuals and institutions seek, which helps to explain why they've done so well.

When it comes to gold, Jim believes that we are likely to see a tradeable rally in the future, but without a real catalyst—such as higher inflation, or strong economic growth in the developing world, or a falling dollar—any rise in the precious metals would simply be a trade.

In this era of financial repression, institutions will continue to buy stocks, and Jim makes the point that investors should steer clear of what he sees as “Armageddon” arguments against financial assets. The bears have argued that the world is going to end for the last 13 years, largely because the markets did crash, and crises did materialize—but things change, and people who want to make money need to adapt to the changing circumstances of the investment landscape. Doing so involves not being guided by fear or greed but by a prudent strategy.

While Jim acknowledges how an overly hawkish Federal Reserve, or other black swan event from the rest of the world might derail the stock market’s rise, he is generally in sympathy with the ideas of Piper Jaffray's Craig Johnson (listen to recent interview here)—who has a year-end target of 2350 for the S&P 500.

US leading economic indicators, which we often cite, bottomed in the first half of the year, and Jim cites signs of them bottoming in other parts of the world as well. If sustained, this should set up an increase in global corporate earnings. Jim believes the soft patch we saw earlier in the year was a one-off event and this also aligns with the majority of current economic data for the US (see here for an overview). Investor sentiment also recently dropped to the second lowest level since 2009, which, as a contrarian indicator, often corresponds to near- to long-term bottoms. Lastly, global central banks are still maintaining very loose and highly accommodative monetary policies, which, until that reverses, will lend support to the stock market.

Jim then shares some investment strategies for investors to consider in the latter part of the program—and does believe in looking overseas for ways to find income in this era of financial repression.

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