Tim Treadgold: Gold should star this year as everything else stumbles – so why don’t the brokers get it?
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Most hardcore investment bankers and analysts don’t like gold either because it won’t fit into their financial models or because “they don’t understand it”.
That comment about not understanding gold sounds as odd today as it did when used a decade ago, around the time it was selling for less than $US1000 an ounce – and just before it shot up to $US1900/oz in September, 2011.
A few fortunes were made in that 90% price rise over roughly two years, and quite a few fortunes were not made because clients took professional advice and avoided gold after being told it’s too risky.
There is absolutely no doubt that gold can be a risky investment as the long slide down after that 2011 price-peak demonstrates, almost slipping through the $US1000/oz mark in late 2015.
But the same point about risk can be made of property developers, retailers, insurance companies, technology developers, stockbroking firms and banks – just ask any investor in Germany what they think of Deutsche Bank these days after its 80% share price fall over the past four years.
The key to understanding gold is to see it as a mirror of the global economy in that it provides an opposing view. When the world is in good order and growth is strong gold is sidelined, but when the world is under pressure, like now, gold stars.
There are two reasons for suggesting that it’s time to take a fresh look at gold, if you already haven’t. The first is that the global economy is stumbling towards a coordinated recession as a series of recent events highlight, and the second is that some professional analysts are sticking to their negative gold view.
Those analysts first because it was a research report from Morgans, a stockbroking firm, which triggered this latest look at gold and why it has a role in any balanced portfolio, and has had for the last 5000 years (give or take a century).
According to Morgans the share price of Australia’s biggest goldminer, Newcrest, is likely to fall from its recent price of around $32 to $24.92, a hefty 22% drop which is why the broker rates Newcrest as a sell (or “reduce” to use its preferred word).
Morgans is allowed to have its opinion of Newcrest and the stock has been a serial disappointment over many years but a factor in the broker’s negative analysis is likely to have been its gold-price assumptions which range from a current $US1302/oz up to $US1329/oz at this time next year.
There’s an obvious problem in those prices because gold is trading around $US1415/oz, comfortably above the Morgan’s assumptions and there’s no doubt that if the current price was inserted into the broker’s financial model a higher Newcrest price forecast would emerge.
To be fair to Morgans, it’s not alone. Earlier this month the internationally-focussed Credit Suisse published a series of low-ball price forecasts for several big-name Australian goldminers.
On a day when Northern Star, a darling of local gold bugs, was trading at $11.50, Credit Suisse said sell because the stock was heading for $6.10 (it actually rose to $11.88 in the days after that advice).
The issue for Credit Suisse seems to be the same as with Morgans, a low-ball gold price assumption of $US1335/oz for the current quarter before a rise to $US1360/oz before Christmas and then a long slide back to $US1300/oz.
Those assumptions by Credit Suisse were also factors in sell tips on a number of other gold stocks, including Newcrest, which it reckons is heading for $20.30, and Evolution, which has a price target of $2.60 compared with its latest price of around $4.37.
It’s in the gold-price assumptions that the problem can be found because conservative bankers and brokers are often blinkered in their global view and can’t see that gold could be entering a period of high demand (and a rising price) because global interest rates have collapsed – and are still falling.
For any bankers or brokers reading this the lesson is remarkably simple; gold rises when US interest rates fall and gold falls when US interest rates rise, with a secondary force being exerted by other currencies, especially the euro.
No-one is currently tipping a rise in US interest rates as its economy feels the heat caused by the trade war with China, a trade war which last week knocked the stuffing out of Singapore’s economy, plunging it into a technical recession.
In the next few days the US central bank is expected to announce an interest rate cut of between 25 basis points (0.25%) and 50 basis points (0.5%) which will further lower the appeal of the US dollar and the Treasury Bonds issued by the US Government.
Europe would like to follow the US but as many of the interest rates in that region are already negative (investors pay for the privilege of parking their money somewhere safe), a European Central Bank preference might be for a return of quantitative easing (money printing).
And then there’s the big bazooka, Donald Trump, the US President who wants to “weaponise” the US dollar by lowering its value to aid US exporters, a step which would put a rocket under gold because investors would shift their dollar-exposed assets into safe havens such as the Swiss franc – and gold.
None of these comments is meant to be a criticism of banks and brokers who claim to not understand gold, but it is a suggestion that they look beyond their financial models at a wider world which is facing its toughest conditions since the 2008 global financial crisis.
And, if that isn’t sufficient reason to see gold as a global currency beyond the reach of governments, ask why most central banks continue to hold gold, and in many cases are buying more?
The answer to that question about central banks, especially Russia and China, is that they’re taking evasive action because they see the US dollar having nowhere to go but down thanks to the country’s massive debt load and the latest plan to use the dollar as a trade-war weapon.
As a final word, never let gold dominate an investment portfolio. Use it as a useful form of insurance for tough times – like now.