Trim Your Gold Positions

by: General Expert

Gold has not been performing very well, which isn’t surprising considering the stock rally.

Gold will continue to disappoint as fear subsides.

Despite many rounds of QE, inflation remains under control.

Many experienced investors thought that the Fed was leading us towards destruction, but they were wrong.

We experienced some shock in 2016, but given the current economic outlook, I don’t expect fear to return.

Gold (NYSEARCA:GLD) is still up for the year, but ever since the market (SPY, DIA, QQQ) started another bull run in July, gold has not gone anywhere.

This is somewhat expected since gold tends to underperform when stocks rise. If an investor included gold as a part of a diversified stock portfolio as I have mentioned before (as opposed to investing in gold in isolation, which is a bad idea), there is no reason for gold's performance to trouble you.

Ignoring the portfolio factor, will gold continue to disappoint? I believe so.

Take inflation, one of the many short-term factors impacting gold. Gold does well when inflation is high, and though some investors were concerned that "helicopter money" (i.e. quantitative easing) was going to cause rampant inflation, it never happened. Furthermore, now that quantitative easing has been over for around two years, we can be sure that there isn't some pent-up "inflation bomb" that is just waiting to explode. The effect of QE is still being felt (yields are still low), but inflation is very stable at just 1%. Of course, this doesn't explain why gold outperformed after the recession. Inflation was not extremely high back then (1% to 4%), but gold still jumped from $1100 to almost $1900. By that logic, there seems to be no reason why gold can't experience another rally. However, I believe that one of the major drivers of gold is no longer there.

Fear Of Quantitative Easing Is Gone

As I mentioned in my other article, investing in gold is a long on fear. While it was difficult to say whether QE would have triggered rampant inflation or not back then, there is no doubt that people were afraid of such an outcome. Between QE 1 to QE 3, the Fed injected $3.5 trillion into the economy, so it's understandable that many investors thought that they were facing impending doom. Note that this opinion wasn't just confined to conspiracy theorists, plenty of smart people thought that the Fed was making a big mistake. The list of people included many famous investors such as Seth Klarman and Jim Chanos. Of course, they all turned out to be wrong.

I believe that more than half a decade after the beginning of quantitative easing, investors are finally realizing that the U.S. isn't going to experience hyperinflation and the economy is not facing imminent collapse. In 2016 we did have some "fear factors" (e.g. widening spreads, fear of Brexit, etc.) that sent gold higher to $1300s; but they were difficult to predict as the economy has always been doing quite well. I admit that I don't have the foresight to predict mass hysteria in the market, but based on the excellent condition of the economy (read Blowout Jobs Report), I see no reason for fear to return.

Given the above, I maintain my position that gold related investments should be trimmed overall, as I do not foresee a plausible scenario (e.g. a crash) in which gold related investments would yield higher returns than the broad stock market. Of course, one can always find a new reason to be fearful, the problem is always discerning between a transitory event that does not undermine the big picture(e.g. May's jobs report) and a real warning sign that foretells the turning of the tide. If you find any evidence of the latter, please share it with us in the comments below.

Click the "Follow" button beside my name on the top of the page to be updated with my latest insights. To learn more about the V20 Portfolio, whose goal is to compound capital at 20% over the long term, I encourage you to read the introduction to my investment process. Premium subscribers get full access to the V20 Portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.