The price of gold has risen sharply over the past month, going from $680 an ounce on September 5, to $741 on October 5. One of the reasons that gold was pushed to 28-year high was the recent Fed rate cut, and speculation that there would be another reduction in the federal funds rate before the end of the year. A lower federal funds rate would make the U.S. dollar less attractive when it is compared with other major currencies, and as a result, investors would use hard assets such as gold to hedge against the falling U.S. dollar.
I have been investing in gold through a mutual fund since early 2002, when the price for spot gold was below $300 an ounce. In the past 5+ years, price of gold has more than doubled. For me, gold is an important piece of my diversified portfolio. Even though I probably started investing in gold at the best time I could have, and have made some nice profits, I feel gold still has room to go even higher because demands for it from developing countries like China, India remain strong. Just how high can the price of gold go?
Last week, Barron’s online published an interview with John Hathaway, Senior Managing Director and Portfolio Manager of Tocqueville Asset Management. Hathaway is managing the Tocqueville Gold Fund (MUTF:TGLDX), which is the fund that I chose for my taxable accounts. In the interview, Hathaway offered his views on a range of issues related to gold. These included gold production, the relationship between the U.S. dollar and gold, and also discussed the different perspectives that are held by gold mining companies. There are several items in the interview that were of interest to me, particularly inflation and gold, and the future price of gold.
Here are some excerpts from the interview:
A recent article in The Economist mentioned a study that concluded gold hasn’t been a reliable hedge against risk or inflation. What do you make of that?
Gold has been among the best-performing asset classes since 1999, when it bottomed out. Also, gold is forward-looking. In the last several years, it has discounted a widening of credit spreads and a shift in the market to a more risk-averse posture and lower asset valuations.
But gold, as you point out, has also risen during a time of rising stock and bond markets.
There have been an anomalous couple of years where gold was viewed as a subset of hard assets and hard assets were sought after. We had a period where gold actually tracked very closely with things it normally doesn’t. Maybe it is noncorrelated.
I wouldn’t try to pigeon-hole gold too much, because if you look at the last four to five weeks, gold has definitely taken off because of concerns about the relaxation of the Fed’s monetary policy and the expectation there will be more of that. Of course, we’ve seen that not just in the gold price, but in the breakdown of the dollar on a trade-weighted basis.
In the following excerpt he discusses the possibility of gold reaching $1000 an ounce:
What gets us to the magic number of a $1,000 an ounce?
I don’t think it will take much. Let’s not forget, in 1980 dollars, gold is less than half of its nominal price today.
The disparity between the amount of paper that has been created since 1980 and the amount of gold that has been produced since then is just enormous. The ratio of financial assets to physical gold is at the low end of a historical range. If you were to mark all the gold to market that has ever been mined, which is a very conservative approach, and then take the valuation of all the global stock markets and all the global bond markets, gold represents about 3%, compared with a figure in the mid-20% range in 1980, which was the top of the bull market in gold and the beginning of the bull market in financial assets.
Gold is a good value, certainly, at these prices, just based on the considerations we’ve discussed. Even if you don’t think worst-case outcomes are in the cards, gold is still rare and hard to find, and believe me, these companies are having the toughest times trying to maintain production, much less build it.
What would be the best investment choice for those investors who want to try to profit from the rising gold price? Would it be investing in physical gold, precious metal mutual funds, or in gold ETFs?
In my opinion, gold ETFs such as streetTRACKS Gold Shares (NYSEARCA:GLD) make the most flexible choice when investing in gold. Unlike mutual funds which invest in gold mining stocks, GLD is backed by bullion. As a result, the price of GLD is derived directly from the price of gold.