- Gold price yet to reflect mounting problems in China and the EU.
- The US stock market correction is not yet done. Gold routed stocks in Q4.
- Gold beat all other assets except silver in the 2009-11 debacle.
Goldman Sachs has already revised its predictions for the gold price for 2019. The Wall Street titan now predicts a good but not great year for the yellow metal, with its price rising a credible 12 percent to $1,450.
Actually, in the present troubled financial markets, it is rather strange that this classic safe haven and portfolio diversifier is not already priced much higher.
Then again, looking back at an article I wrote in late 2009 when Dubai was in $59 billion default and the world looked about to end, I was surprised to see that gold was then only priced at $1,195 an ounce.
But in 2009, the gold price did go up 25 percent. I wonder if that is not a more appropriate benchmark for 2019 than the latest guidance from Goldman Sachs. Could it be that their precious metals’ team would actually agree but house policy does not?
Still, after 2009, all the real action for the yellow metal came in the next two years, with the top in October 2011 of $1,923.
My early support for gold as the most important asset class in that period was completely vindicated. Only silver delivered a better performance within any major asset class, with investors tripling their money.
Could it be that history will at least rhyme, if not exactly repeat itself? For while it is true that economic circumstances in the US are different from 2009, as there is no subprime lending crisis, China’s 250 percent-to-GDP debt load is very worrisome.
Maybe this time round we will see a second Asian Financial Crisis like in the late '90s, only it will be much more significant because China and this region are far more important to the global economy than they were 20 years ago.
Wall Street Valuations Too High
All the same, a US stock market that became more overstretched comparing market capitalization to GDP than in the Great Crash of 1929 - this ratio peaked last October above 180 percent - likely has a lot more downside than the current correction.
Warren Buffett always gives this as his favorite yardstick for overvaluation. Did he forget about it last year when he was buying Apple (AAPL)?
In the fourth quarter, the S&P 500 dropped 13 per cent, while gold rallied by seven percent and gold mining shares by 13 percent. If we get a second leg of this downturn in stocks - after January's dead cat bounce - will gold do even better? It certainly continued to rise in January.
Donald Trump's high-profile trade war with China is ongoing and very bad for the world’s second-largest economy given its current domestic slowdown and debt overhang.
A Second Asian Financial Crisis?
The drop in Chinese luxury good sales and plunging tourist numbers is ominous, as is the first fall in annual car sales in 20 years. A second Asian Financial Crisis is happening but is not yet recognized as such outside of the region. Hotels and planes are emptying again as I noticed there last week.
Meanwhile, Europe has been poleaxed by the Brexit crisis that still threatens at least continued stagnation in the UK economy, currently bottom of the G20 league table, and a nasty hole in EU GDP this year.
Indian-owned UK car manufacturer Jaguar Land Rover (TTM) is laying off 4,500 staff members, and Ford (F) is downsizing by 1,000 staff members in the UK. Even though it now looks probable that the Brexit will not actually happen, a surge in sterling when it is finally abandoned would hit its weak economy hard; a no-deal Brexit would be a calamity, with sterling and house prices dropping 30 percent, according to the Bank of England.
For the record, both Germany and Italy are actually in a recession right now. Japan is nearly there.
Gold Price Is Too Low
There is a whole world outside the United States, and it is not in great shape at the moment. Even Dubai, where I live, is struggling to emerge from an oil-induced slowdown of three years, albeit debts and overbuilding are not nearly on the same scale as they were in 2009.
Perhaps it will take even more bearish news to produce a big reaction in the price of gold - the classic safe haven in global financial crises - that now lacks any real competitor with the recent bursting of the cryptocurrency bubble.
For although it is true that the global economy may have to deteriorate significantly more for a reversion in interest rate cuts and quantitative easing, it is not difficult to imagine us getting to this position later in 2019. The Fed backed off from raising rates last month.
The Chinese have announced a stimulus package for small businesses and an easing of bank reserves, probably just a taste of what’s to come. In 2009, the country's market stimulus package was equivalent to half their GDP. How will they respond this time around?
Then, gold and especially silver prices would really lift off again. The serious money is already getting its act together.
The $10 billion acquisition of Goldcorp (GG) by Newmont Mining (NEM) is an indication that the precious metals sector itself is repositioning for a gold price increase. Newmont seems to have picked up a bargain with Goldcorp shares trading near multi-year lows.
So, follow Goldman Sachs' advice on buying gold in 2009 and you could get more than promised. Sure, the US does not face the same Armageddon it did a decade ago. But there is a bear market brewing in stocks and a whole world of economic problems out there.
Buying gold, which is on a very different cycle to other assets and left its bear market behind two years ago, makes sense. Revisiting a previous all-time high of $1,923 from $1,300 is possible, though even a 12 percent gain might look good for any asset class in 2019, and silver is already outperforming gold.
My latest thoughts on how exactly to best invest in precious metals this year are in this new article for The National newspaper.
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