In my view, there’s still a good case for including gold and gold stocks in a portfolio, despite their recent period of outperformance.
In other words, I still think we’re in the first half of this gold bull move from 2015/2016 lows, rather than the tail end, and that gold is eventually due for a breakout to new nominal highs in dollar terms.
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| Chart Source: St. Louis Fed |
I added gold and gold stocks to my model newsletter portfolio in October 2018, and have dollar-cost averaged in from then until the present day. In the year and a half or more since then, gold and gold stocks have outperformed.
Should contrarian investors get concerned? Should we pivot away from gold now?
In my opinion, no. I still think this rally has legs, and remains an attractive risk/reward addition to a diversified portfolio. It’ll rise and fall of course, but my base case continues to view gold as being in a healthy upward trend. I’m still happy to buy gold at current prices, even though they’re not as good as prices that I bought at back in 2018 and 2019.
Here are four reasons why I remain bullish on gold in the intermediate and long term, without much care for week-to-week fluctuations.
As long-term readers know, one of my favorite charts for gold is to compare the price of gold to the growth of broad money supply per capita. This works for any major currency, and I happen to track it in U.S. dollars, which is perhaps the best comparison because both gold and the dollar are traded worldwide.
The idea behind this ratio is that, over time, currencies inflate and devalue vs gold at various rates, while gold holds its purchasing power over the long term. And the speed with which currencies lose value is significantly tied to their money supply growth rate, especially when central banks print more and more currency to finance government deficits.
The reason I like to compare it per capita, is because the supply of above-ground gold grows at 1% or a little more per year, which is similar to the global population growth rate, and similar to the U.S. population growth rate. According to the World Gold Council, there are about 200,000 tonnes of mined gold known to exist, which equals roughly 7 billion ounces. There also happens to be 7–8 billion people in the world, or just under 1 ounce of gold per person.
In other words, decades ago there was about one once of gold per person above ground, and today there is still about one ounce of gold per person above ground. The ratio of how much gold there is per person is a relatively static figure. And yet, the global supply of currency per capita, and particularly the U.S. supply of currency per capita (for gold in dollar terms measurement), keeps increasing. Over the long run, the price of gold tends to keep up with this rate of monetary inflation, with occasional overshoots or undershoots.
By default, I like to normalize it to 100 in 1973 or 1995, and track the relative growth from there, which result in roughly the same number regardless of which of those two dates are chosen. I choose 1973 because that was shortly after gold was decoupled from the dollar, and therefore gave the market time to adjust gold to a reasonable price. And I choose 1995 because it was a perfectly boring time, without crises, housing bubbles, stock bubbles, excessive money-printing, and so forth.
So, those dates represent my baseline assumption for what gold “should” be worth against the dollar in a normal environment as a back-of-the-envelope thought experiment, and then I track the price growth of gold and the inflation growth of the money supply from those dates.
Source: Lyn Alden Schwartzer | SeekingAlpha
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