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A few weeks ago we wrote that this is The
season for gold. At the time, our reasons for being bullish on the
“barbarous relic” were mostly to do with negative economic news coming out of
the United States, including a bond yield curve inversion, signaling a
recession is on its way.
Gold’s current movement is not so much related to economic malaise, but
rather, is being judged against bond yields and what the Federal Reserve is
going to do next. The precious metal is trading near a six-year high as
US real Treasury yields skid along at practically
0%.
On the cusp of the Federal Reserve’s decision to lower, hold or raise
interest rates, we now have another reason to own gold: popping asset
bubbles.
An esteemed strategist at Societe Generale SA is reportedly
advising clients to buy gold as a hedge against asset bubbles likely
to grow even larger if the Fed follows through on a decision to cut
rates.
“Gold is the perfect response if you’re entering the bubble game,”
Alain Bokobza, head of global asset allocation, told Bloomberg from
London. “Every time you have such a situation, gold has soared.”
Forbes
gives some good evidence of a bubbly stock market. On July 26 the S&P
500 hit a new all-time high, the best performance for the first seven months
in 22 years. But price to earnings ratios are way out of whack. For the
S&P 500, p/e ratios based on the last four quarters of net earnings are
at 22.5, compared to an average 19 for the last 20 years and 16 over the last
century.
Those expecting all the fun to continue may be in for a shock.
“High prices today mean puny gains tomorrow. From these levels, what returns
can investors reasonably expect?” Forbes warns. “Multiple expansion as a
source of gains seems tapped out.”
Not so for gold. The metal used mostly for jewelry and investments is
poised for another leg up after the Federal Reserve’s July 31 meeting.
At its meeting in June, Fed Chair Jerome Powell strongly hinted that a
rate cut - the first in a decade - was coming, which lit a fire under the
gold price. Gold investors love low interest rates because that could weaken
the dollar, thereby pushing up commodity prices and making dollar-priced investments
like gold attractive. The idea of monetary easing causing inflation also
appeals to gold investors, since the precious metal is known to hold its
value over time versus depreciating fiat (paper) currencies.
The gold price is also being lifted by negative interest rates on
sovereign debt, at just about every developed-country’s central bank except
the United States.
If investors have to effectively pay for lending money to
borrowers, gold is seen as a better investment.
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