Why Gold Could Go Ballistic (And How to Play It)
As I write this, gold is trading at three-week highs. And now the babbling heads on TV are calling for a pullback.
Man, I wouldn’t make that bet with someone else’s money.
Sure, the Fed is making noises about raising interest rates. Gold don’t care.
The Chinese aren’t buying the metal like they used to. Year over year, sales out of the Shanghai Gold Exchange are down almost 18%. Gold don’t care.
Global jewelry demand is soft. Gold, the “honey badger” of investments... it just don’t care!
In fact, it wants to go higher.
Don’t Believe the Guy on TV
First, let’s deal with the fact that every other day, some “expert” on CNBC says gold has to correct. It just has to.
Sure, eventually gold will take a breather. But what folks should be wondering is just how high it will go before it finally takes that pause.
And you know how I can tell those sweaty TV hucksters reek of desperation? Because many of them represent funds.
It’s obvious what funds are doing in gold now...
They’re buying with both hands. Take a look at the combined holdings of the major gold exchange-traded funds.
There has been a HUGE upswing in demand for gold by ETFs. The biggest of them all, SPDR Gold Shares (NYSE: GLD), has added 239 metric tons so far this year.
This helped push combined ETF gold holdings to the highest level since 2013 - a whopping 59.849 million troy ounces.
That’s 1,861.5 metric tons.
So who buys gold in ETFs? Mom-and-pop investors buy some, but not a lot. The vast majority of buying comes from institutional investors.
Yes, the same guys appearing on your TV, warning of a correction.
Gee, do you think they may want to buy more gold at cheaper prices? Ding-ding-ding! Here’s your cigar!
That hunger for gold by institutions could put the yellow metal on the launch pad.
Waiting on Janet
Could things go wrong for gold here? Maybe. Against all evidence, Janet Yellen and the Fed could follow through on their tough talk and raise interest rates.
If you’re wondering how that would affect gold, well, gold pays no interest. So, if interest rates are very low - as they are now - the “carrying cost” of holding gold dwindles to next to nothing. But if interest rates go higher, the carrying cost of gold goes up, and prices can go down.
Here’s why you shouldn’t sweat that...
Remember, gold is a global market. And we have seen new 52-week lows in 10-year bond yields very recently in most of Europe. That includes Germany, Austria, Denmark, France, Belgium and Switzerland. We’ve also seen new bond yield lows in South Korea, Australia, New Zealand and Russia.
And it’s not just 10-years.
The countries in red are those where gold is effectively a high-yield asset. As you can see, the 10-year yield in the U.S. is positive... but it’s the lowest since February.
More interesting, the 10-year yield is getting thisclose to the yield on the two-year note. It’s the smallest difference since 2007.
Let’s say the 10-year yield dips below the two-year yield. That’s what economists call a yield-curve inversion. It’s essentially a horn of doom warning about a possible recession.
Given this situation, if the Fed’s members got one brain between them, I’d say they’re not going to hike rates until the third quarter. If then.
A Multiple-Stage Rocket
Regardless of what the Fed decides, there are several other forces that should elongate gold’s rise.
Those forces include...
- The migration crisis in Europe. “Migration” sounds so much nicer than “invasion,” I guess. But whatever you call it, a big chunk of the Middle East has decided it wants to live in Europe. The ties that hold Europe together are buckling under the strain. And times of crisis always lead to folks buying gold hand over fist. And speaking of which...
- Britain Wants to Leave the European Union. That’s according to the latest polling data. The vote is on June 23. And based on anecdotal accounts - no hard data is in yet - this is sparking a surge in gold buying by the Brits.
- Money Is Fleeing China. An estimated $25 billion flowed out of China in April. That marked 25 straight months of outflows. Capital Economics believes the flood of cash probably rose to $32 billion in May. It’s pouring into real estate markets across North America and Europe. It could also pour into gold. Even if the Chinese aren’t buying as much gold at home, they may be hoarding it overseas.
All of these crises are imminent. The countdown is underway.
To best profit, I’ve been telling you to buy miners rather than gold. I recommended the VanEck Vectors Gold Miners ETF (NYSE: GDX) here back in April. It’s a basket of leading gold miners.
Let’s see how the fund has done since then...
We can see that the S&P 500 is up 0.08%... gold trounced that at 3.4%... and gold miners are up a whopping 17.5%.
If you didn’t buy last time, that’s a shame. But as I’ve shown you, there’s plenty of upside ahead.
Have thoughts on this article? Leave a comment below.
P.S. Gold is obviously having a heck of a year - but it’s important to understand that this rally is just getting warmed up. (We are still coming out of a 4 1/2-year bear market, after all...) To help you supercharge gold’s move, I’ve assembled research on a play that could hand you an exceptional gain of 400%... enough to turn every $5,000 invested into $20,000 over time. Click here to get all the details.