Should I Buy Gold in 2019?

By Rich Checkan
President and COO, Asset Strategies International

Commodities

Is 2019 the year for gold’s long-anticipated breakout?

That’s the No. 1 question on our clients’ minds. For me, the answer lies in a very simple and practical tenet of investing…

“Money always goes where it is treated best.”

Shortly after joining Asset Strategies in 1996, I accompanied Michael Checkan, my uncle and ASI’s co-founder, to The Agora’s (the parent company of The Oxford Club) Christmas party. I was introduced to Dr. Steve Sjuggerud, The Oxford Club’s Investment Director at that time. In the buffet line, Michael asked Steve for his thoughts on the market. Steve replied, “Money always goes where it is treated best.”

To this day, that’s exactly where I start my analysis of anything and everything financial. And it’s how I answer the question posed above – by looking at several options and determining where my own money would be treated best.

The Stock Market

The “irrational exuberance” we saw in stocks in 2017 has been replaced with volatility and a nearly 20% pullback in the Dow and the S&P 500 – almost bear market territory.

The initial effects of the tax cuts championed by President Trump are wearing off. Earnings are fairly weak for many companies or actually losses once you factor out the impact of the tax cuts.

Further, the on-again, off-again trade war between the U.S. and China has spooked investors worldwide, causing them to run for cover into some of the traditional safe havens.

Many are predicting one more leg up for stocks to cap this 10-year equities bull market. If it happens, it should be the last hoorah for this bull. And 2019 is not likely to be as kind to stocks as the previous 10 years have been.

Cash

The Federal Reserve has been under a lot of pressure this past year from President Trump. Fed Chairman Jerome Powell has stayed the course on raising interest rates despite the president’s criticisms. In addition to the retreat in stock prices, many now blame him for the slowdown in real estate due to higher borrowing costs.

I have long believed that economic indicators have not warranted raising rates and the only reason the Federal Reserve is doing so is to give itself the ability to lower them once the next recession hits.

It sure looks like it’ll have that opportunity in the not-too-distant future. A prudent Fed chairman would be wise to pause interest rate increases in 2019, since the current rates barely counteract inflation.

With real returns on time deposits at zero or negative numbers, cash deposits will likely struggle to keep up with inflation in the new year.

Bonds

2018 saw yields steadily falling and yield curves poised to invert.

I’m no bond guru. I leave that to The Oxford Club’s bond master, Steve McDonald. But, to me, low yields, a preference for short-term versus long-term debt and a weak appetite amidst volatility suggest bonds (specifically Treasurys and munis) likely won’t be where your money is treated best in the new year.

Gold

In 2018, gold fought against significant demand for traditional stock and mutual fund investments and weathered tremendous exchange-traded-fund outflows. Gold has been under pressure from a stable and slightly appreciating U.S. dollar. Still, gold has shown incredible resilience all year – especially through the first three quarters.

It rallied at year-end, suggesting a flat or slightly positive trend year over year. Much of this is due to the increase in central bank buying from countries like Russia, China, Turkey, Kazakhstan, Poland and others. It’s all part of a larger move to reduce U.S. dollar reserves in favor of gold.

Despite the move to de-dollarization, the dollar has remained strong because all the other major currencies are inherently weak. It remains the strongest of a whole stable of weak fiat currencies worldwide.

With the gold-silver ratio (the number of ounces of silver it takes to buy 1 ounce of gold) hovering largely between 80 and 85 since August 2015, a significant base is forming for gold around current price levels. I believe the lows for gold were set in December 2015 at $1,050 per ounce. Since then, trading has been in fairly narrow ranges with a few failed breakout attempts.

Dollar-Cost-Average Into Gold

I believe gold will continue to face U.S. dollar headwinds in 2019, with stronger winds in the first half of the year. This should prevent gold from making a significant increase… initially.

But despite the pressure from the dollar, I predict gold is where your money will be treated best in 2019 for a few reasons…

First, the increased volatility in international markets due to global and economic instabilities will foment the safe haven flows that began in 2018.

Second, alternative assets competing for your investment dollars are not expected to perform well in the coming year. The stock market should continue its descent, either with or without a last hoorah. Interest rates should stabilize in the coming year, so term deposits will continue to generate no real return. Bonds will not be attractive compared with gold.

Finally, unlike stocks, bonds, mutual funds and term deposits, gold is not necessarily an income generator. It is a wealth preserver… it is financial insurance. It will perform this role well in 2019, as it has for more than 5,000 years.

Most investors are waiting to see whether the anticipated rise in gold prices is for real. For them, a breach to the upside of $1,350 per ounce may not be enough. Most will look for confirmation of the breakout above $1,400 an ounce.

The good news is you don’t need to rush into gold for fear of missing the opportunity. Your financial insurance premium (the price per ounce of gold) is cheap right now. It is on sale. You should have plenty of time to dollar-cost-average into gold to fill your desired portfolio allocations during the first six months of the new year.

Gold is where your money will be treated best in 2019. So it’s the best place I can think of to Keep What’s Yours!

Sincerely,

Rich