Gold rally has been historic
Gold’s rally has been nothing short of historic, but 2020’s rush is still far from over, according to the investors who bought into it and the analysts being forced to continuously change their price targets.
The yellow metal’s price has surged more than US$330 per ounce since March and is now trading above US$1,800 per ounce for the first time in nine years. Miners have also benefited from the run and watched their stocks rally, while perhaps the sector’s most popular exchangetraded fund, the VanEck Vectors Gold Miners ETF, has doubled in value.
The growth potential shown by the sector is a stark reversal from the minimal returns it offered investors during the past decade as bullion was, for the most part, stuck in a range between US$1,100 and US$1,300.
One thing pushing the investment thesis for gold in 2020 has been the macroeconomic impacts of COVID19, iTrustCapital Inc.’s economist-in-residence Tim Shaler said.
“Gold is being driven higher for two reasons,” he said. “One is it’s a hedge against future inflation, so as the risk of future inflation goes up, you’ll expect more people to want that hedge and to buy gold. The other set of gold buyers are the Armageddon buyers.”
Since global central banks continue to pump the equivalent of trillions of dollars into their economies and print money to bail out their respective economies, raising interest rates is not realistic, Shaler said, so inflation becomes a risk.
The so-called Armageddon buyers, meanwhile, are gobbling up the yellow metal as a play on the COVID-19 pandemic causing even more havoc for global economies and investors rushing toward bullion for a safe haven.
A second unlikely scenario they’re investing on, Shaler said, is one where countries run out of cash and have to temporarily switch to gold.
Unlike in prior years, it’s not just the “gold bugs” who feel confident about this investment’s potential.
For example, Bank of America Corp. in April raised its 18-month price target on gold to US$3,000, citing the pressure that fiat currencies may come under due to central bank activity. Goldman Sachs Group Inc. raised its 12-month target to US$2,000 last month due to similar concerns about currency debasement.
Shaler said it’s reasonable to expect a US$2,000 price point by the end of the year, because the futures market is already pointing in that direction.
David MacNicol, president and portfolio manager of MacNicol and Associates Asset Management Inc., has kept about 10 per cent of his clients’ portfolios in gold — both physical and in mining stocks — over the past several years.
The prolonged rally, however, has convinced MacNicol to boost that exposure to about 20 per cent per portfolio. The metal’s performance has even allowed him to convince one client, a longtime holdout who wanted no gold in his portfolio, to finally accept the standard allocation.
“People are finally starting to clue in now,” he said. “If you lined up all of the world’s currencies . . . which would you rather have? The U.S. dollar or gold? I personally think gold is the currency of choice.”
MacNicol mostly manages retirement portfolios and isn’t the biggest fan of investing in publicly-traded tech companies, so the added gold exposure has allowed him to replace the returns he isn’t getting from swing moves in volatile tech stocks with an approach that results in slower but steadier gains.
He has looked to smalland mid-cap stocks for returns, since large-cap gold miners such as Barrick Gold Corp. and Newmont Corp. have been rangebound since recovering in April.
The portfolio manager likes B2Gold Corp., which is up 13 per cent since the beginning of May, and Lundin Gold Inc., which has rallied more than 10 per cent in the past three months.
The future will be even brighter, MacNicol said. He sees the price of gold hitting US$2,500 by the end of 2021.