Gold Prices Are Near Record Highs. They May Keep Climbing for the Next 10 Years.
Gold has always been a hit or miss investment — usually more miss than hit. So, it’s surprising to suggest that now is the time to buy gold for the long run.
Goldbugs, the true believers, love gold for its history and its potential to act as a store of value during times of runaway inflation. However, it’s important to remember that gold is just a yellow metal with no cash flow, dividends, or underlying business to evaluate. Its value is solely determined by market perception. And in a post-apocalyptic world, survival will depend on other resources like guns, food, water, and land.
Historical data also reveals gold’s limitations as an investment. Over the past 20 years, gold returned 8.3% compared to the S&P 500’s 9.7%. Over the past 40 years, it returned 4.1% while the S&P 500 returned 11%. And since December 4, 1975, the earliest available data, gold returned 5.6% compared to the S&P 500’s 12%. These numbers indicate that gold has not been as lucrative as other investment options.
However, despite its shortcomings, gold is once again capturing attention. On December 4, front-month gold futures reached a record high of $2,152 per ounce, marking a 12% increase since October 5. Analysts argue that this rally is a short-term response to factors like a shift away from tightening monetary policy, dropping bond yields, and a weak U.S. dollar. Once these drivers subside, gold’s rally may temper, leading some experts to recommend taking profits.
But what if the current rally is a precursor to a more extended period of outperformance? History suggests that gold has the potential to outperform for years in specific situations. For example, during a period of hyperinflation from August 1976 to September 1980, gold gained an annualized return of 56.3%, while the S&P 500 rose by only 10.8%. It also outperformed from March 2001 to August 2011, with an annualized return of 20.6%, while the S&P 500 only saw a 2.4% increase amidst the bursting of the tech bubble and the financial crisis.
There are indications that another period of outperformance is emerging. The relationship between gold and U.S. Treasury yields is a key factor to watch. Typically, when bond yields rise, gold falls. However, in the current scenario, gold has risen despite ongoing interest rate hikes by the Federal Reserve. Stephanie Pomboy of Macro Mavens suggests that gold’s behavior in response to rising rates may be signaling a disconnect between gross domestic product (GDP) and gross domestic income (GDI). This disconnect has preceded previous recessions in 2001 and 2007. Pomboy argues that gold’s rise can be justified by the anticipation of rate cuts or a resurgence in inflation, both of which would have significant implications for the broader market.
While higher inflation or a severe recession are not essential prerequisites for gold’s upward trajectory, geopolitical tensions and a shift away from the U.S. dollar could play a significant role. Countries are increasingly seeking to protect themselves from potential U.S. sanctions and the massive U.S. debt, leading to some erosion in the U.S. dollar’s dominance. The commitment of Asean and BRIC+ countries to using local currencies as much as possible is a notable example. As central banks worldwide continue to buy gold, global investors remain hesitant, with trade in and out of the metal witnessing modest fluctuations.
Although a near-term pullback in gold cannot be ruled out, chart analysis suggests that gold could reach $2,400, an 18% increase from its recent price. Chart Smarter’s Douglas Busch even suggests a price target of $3,000 if gold can surpass resistance on the monthly chart by closing above $2,100 in December. It’s essential to note that this level is still below the inflation-adjusted high of $3,333 achieved in early 1980.
In conclusion, gold prices are currently near record highs, and there are indications that this rally may continue. While gold’s historical performance has been lackluster compared to other investment options, specific factors like geopolitical tensions, shifting monetary policies, and a potential disconnect between economic indicators could drive gold’s upward trajectory. Despite the uncertainties and potential pullbacks, the allure of gold remains strong for investors seeking a safe haven or a hedge against inflation.
