Tim Treadgold: Why gold could be a $2000/oz winner in 2019
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Apart from uranium, which can be difficult to buy and even harder to hold, the best performing metal of 2018 was gold. But that leads to an obvious question – will gold outperform other metals in 2019?
Unfortunately for investors looking for simply a yes/no answer the best I can do is offer a probably, while adding the observation that conditions for an upward surge in the gold price have rarely looked so good, largely because everything else looks so bad.
The forces that move the gold price are a combination of global economics, monetary manipulation, and human emotion, a powerful mix that meets in a metal which has been recognised as a store of wealth for thousands of years.
People and banks, especially central banks which lie close to the heart of every country, buy gold in times of uncertainty, or when they lose trust in other assets, or governments make a dog’s breakfast of governing.
In other words, the time for gold to shine has probably never been better than over the next few years as crises mount and a flight to safe haven assets gathers pace with the favourite hiding places traditionally being Swiss francs, the US dollar and gold.
Of those three choices, Swiss francs can be risky and the US dollar, given recent signs of a slowdown in the US economy and the problems brewing at the top of government, appears poised to slide. Especially when the US central bank ends its current round of interest rate increases sometime around mid-year, which seems likely.
That leaves gold as the last man standing, which is also the reason gold won the metal sector drag race this year because while gold is actually down 0.8 per cent ($US11 an ounce) on where it was exactly 12 months ago, everything else has fallen further.
Copper is down 14 per cent. Nickel is down 9.5 per cent, zinc is down 20 per cent, iron ore is down 7 per cent and oil is down 12.5 per cent over the past year and 35 per cent from its October high of $US87 a barrel.
Uranium, the metal which outperformed gold largely because it is crawling out of deep hole that followed the Fukushima nuclear power plant meltdown of 2011, is up 41 per cent at $US29 a pound, but as most proposed new uranium mines need a price of at least $US45/lb to make a profit, not much is likely to happen with Australian-listed U-stocks for some time.
Follow the money
So, if gold is an asset most likely to withstand, or even benefit from a global financial slowdown and ongoing political chaos, why is it so poorly researched by traditional investment banks and stockbroking firms?
The answer is simply that not everyone likes gold. Some smart investment analysts even refuse to research the metal, or the companies that mine it, because “we don’t understand gold” – and yes, I have actually heard that comment.
It is, of course, a cop-out, but the reason gold is hard to understand is because of the multiple factors influencing its price; there are too many parts moving in different directions at the same time for anyone to predict with confidence what gold will do.
The only safe way to assess gold, and judge what it might do in the future, is to see what the biggest investors in the metal are doing with theirs. If that sounds familiar, it’s the same process some people use to judge the property market because people who own a lot of something generally have a better feel for its value than those who don’t.
With gold, the big owners are the world’s central banks and they’re buying more for an interesting reason; they don’t necessarily trust the money printed by their own, or other governments. Gold is neutral, free from government activity.
In October, the latest month for data collated by the World Gold Council, some of the big government purchases included Turkey (10.7 tonnes), Russia (29.9 tonnes) and Hungary (28.4 tonnes). The biggest holders, the US with 8133.5 tonnes, Germany with 3369.7 tonnes and Italy with 2451.8 tonnes did not add to their stockpiles.
More interesting than the purchases – the WGC did not record any gold sales by the world’s central banks.
Outlook is positive
For Australian investors the outlook for gold, and gold equities, is more positive than it might look if only the US dollar price is used as a yardstick. That’s because gold is much more than a commodity – it’s also a currency.
The best test of the currency/commodity feature is to look at the Australian dollar gold price over the past 12 months. While it is down that marginal 0.8 per cent in US dollars it is up $A90/oz, or 5.4 per cent in A-dollars, which is one reason why most Australian goldmining stocks have performed well over the same period.
While the outlook for gold is positive there is also no consensus among the experts.
Prominent US investment bank JPMorgan reckons gold will have a flat first half of 2019, hovering between $US1200 and $US1250/oz, before a push up to around $US1400/oz in the fourth quarter. If correct, that does something interesting to the Australian gold price because at the latest exchange rate of $US1400/oz, gold converts to A$1947/oz – an all-time high.
BMO Capital Markets, a Canadian outfit, has a different view with gold rising to $US1260/oz in the first quarter of 2019, then up to $US1300/oz in the middle of the year before easing to around $US1270/oz.
Goldman Sachs is the most positive about gold. It sees an average of $US1313/oz next year, before rising rapidly to $US1413/oz in 2020 and then up to $US1510/oz in 2021.
To gild the lily somewhat, and to use the latest Aussie dollar exchange rate of US71.9 cents, that $US1510/oz becomes an eye-catching $A2100/oz.
How to get gold into your portfolio
There are many ways for investors to add gold to their portfolios.
If you follow the top picks of Macquarie Bank among companies already in production you might look at OceanaGold, St Barbara, Resolute, Kirkland Lake, Northern Star and Aurelia.
Macquarie’s top picks among developers and explorers are: Dacian, Gold Road, West African and Bellevue.
If equities are not your cup of tea there are many gold-backed funds such as the sector leader, SPDR Gold Shares, or a number of options offered by the WA Government-owned Perth Mint, including its GoldPass.
Or if you’re passing the Mint, just pop in and buy a bar – it’s actually very easy and you can be confident that it is pure (99.99 per cent) gold.
As a final point, you really can’t avoid the potential for 2019 being a re-run, only worse, than 2018 with the US v China trade war crimping global growth, governments in trouble and grave uncertainties about what will happen to Britain after it quits the European Union or, for that matter, what might happen to Europe when it loses one of its biggest members.
Analysed any way 2019 has a whiff of trouble to it – and gold loves trouble because it is the ultimate counter-cyclical investment.