On the back of the U.S. dollar it says “In God We Trust”. For the smart money however increasingly it is in Gold We Trust.
Gold’s blistering start to 2016 may be just the beginning and bullion may prove to be this year’s best performing asset as central banks embark ever more on unconventional monetary stimulus.
Gold year-to-date has outperformed all paper currencies. Gold is a currency with no central bank, so if you simply want to sell paper currencies, the easiest way is to buy gold and gold mining stocks.
Gold is the ultimate beneficiary when central banks ultimately run out of ammunition and more stimulus and negative interest rates increasingly become counterproductive, as Japan under Abenomics is showing us.
Evidence is the yen- gold correlation, which has surged to the highest since 1978 amid the global scramble for capital preservation haven assets following negative interest rates in Japan and Europe and the U.K. vote to leave the European Union.
Gold and Gold mining stocks are worldwide the best performing asset class.
Gold has outperformed the S&P 500 by a wide margin of +26% this year as the S&P 500 has risen +2% year-to-date and Gold +28%.
In the S&P500 index the best performing stock among 500 U.S. large cap stocks is Newmont Mining rising +130% so far this year. In the UK equity market all top 3 best performing stocks are gold and mining stocks. Fresnillo +183%, Anglo American +143% and Rand Gold Resources +134%. In China where the Shanghai Composite Index is the 5th worst performing market in the world, falling -18% year-to-date, the two best performing stocks are Shandong Gold Mining +132% and Zhongjin Gold Corp +57%. In Indonesia, gold play ANTAM has risen +127% and Singapore listed GNMC Goldmine is up +208% so far this year.
Investors and indeed banks now seem to take notice and recently have upgraded their gold and precious metals forecasts. Many mainstream banks until recently were neutral if not “underweight” gold but now it seems there is shift in the narrative and target prices are upgraded. A strategic asset allocation of at least 15 percent to the gold theme make sense if capital preservation in a negative interest rate world is the mandate.
How high can gold prices go ? If the United States, the Eurozone and China were to agree on a gold standard using M1 as the money supply and a 40 percent gold backing, the implied price of gold would be about $ 10,000 an ounce. If the same 3 major central banks used M2 as money supply and 100 percent gold backing, the implied bullion price would be about $ 50,000 an ounce.
Many investors potentially have too much an allocation to central bank inflated corporate bonds and overvalued equities and maybe too little or no allocation to gold and gold mining companies.
If absolute returns and market price action so far this year are any indication it seems the smart money is trusting in gold.
Published:31 August 2016
The article first appeared in FORBES magazine, Indonesian edition.