Gold as an investment has been in a real rut over the past 6 years, a period of time where it hasn’t gained a thing. Analyst Chris Terry thinks it is due for a revival soon.
There’s just not a lot of excitement with gold these days, with investors at least. 6 years ago, gold traded around $1300 an ounce, right around where it trades today. We’ve traded in a pretty tight range as far as gold goes for quite a while now, and while stocks have been going up over this time period, gold has done virtually nothing, on this time frame anyway.
Gold is not an investment that can just be left to itself though, and while stocks aren’t really like that either, you can get away with a strategy like this with stocks because they go up over time. Gold really doesn’t work the same way, and the only sensible way to treat it is to be in it at the right times and not be invested in it during the lean ones.
The lean times for gold include when it’s trading in a sideways market, like the one we’ve been in. It is hard to imagine anyone thinking that they have done well with this investment lately, as opposed to when it was hot and the price shot right up, or times when it has tanked and left investors with some pretty big losses percentage-wise.
There’s also a cost with investing in gold, whether that be the costs of buying and holding the physical metal, or management fees with investing in gold exchange traded funds. ETFs do have a lot of benefits, and the management fees are quite modest, but if gold’s price doesn’t go anywhere, you’re left with paying the management fees every year on a road to nowhere.
Gold ETFs have lost a percentage point on average each of the last 5 years, right around what it costs in fees to hold the shares, but a 5% loss in 5 years while the stock market raged on isn’t all that exciting. A lot of people use gold as a hedge but there has not been all that reason to hedge anything over this time, and it doesn’t really make sense to hedge much during a clear bull market even though a lot of investors do this.
Gold Stocks Can Be a Great Way to Speculate on Gold
We might be moving toward a time where people will use gold more as a hedge, and this can be something that can indeed move prices up, potentially to a level where this may even be an opportunity to put together some meaningful capital appreciation in addition to rescuing some of your stock positions from being exposed to a bear market if and when things come to that.
One of the real benefits of a gold ETF or buying shares in a gold mining company such as Barrick is that we aren’t committed to holding it for several years like we are when we hold physical gold ourselves. This can allow us to take advantage of a shorter-term view of gold, like a position trader would, where we may hold it for a few months or longer depending on market performance.
When we hear things like gold started and ended 2018 around the same place, or that it is only up 2% in 2019 thus far, this does all sound pretty dull. However, 2018 on a weekly chart produced 2 clear trends, and some pretty nice ones at that. We started the year flat, then had a bear trend from May to October, then a nice rally taking us up to today. If we’re just holding gold all this time, this really won’t matter, but gold still moves, and we can’t call it a complete dog over all this time, even though it’s been one from a longer-term perspective.
We can hone in even more if we use daily bars, and there’s usually something going on with the dailies, like how gold has been moving up over the last week or so. Since the high of February, we’re into our fourth trend now, with each lasting a week or two and producing some pretty well-defined moves, including the current upward one.
Plenty of people trade gold on intraday charts as well, and use the leverage of the futures market and with contracts for difference to amplify these moves. You really need to be trading on a very short leash if you are using leverage though, because even a modest move against you, the kind that swing and position traders would use, can wipe you out, so this type of trading relies on exiting trades when things go against you a bit and staying with the moves that are in your favor.
Individual investors really don’t even want to be bothered with having to spend too much time and effort timing their positions, and may even find position trading to be a little much, and would rather hear about when the price of gold will go up again significantly. According to Deutsche Bank’s Chris Terry, that time may be approaching soon.
Gold and Barrick Gold Have Been Pretty Bullish Already of Late
We at least need to preface this by mentioning the current bull move with gold, and you won’t really discover that by just looking at its year to date, you have to go back to the beginning of the current move in October. It’s not that we can go back in time and buy some then, but if we’re looking to predict a future up move, we need to at least account for how much we’ve moved up thus far.
The number in play here is $1184 an ounce, the low last October 1. This is also around the time where the stock market started to sink, and when money started to flow out of the stock market more, with some making its way into gold.
We’ve been able to sustain a move of 10% through the subsequent stock market rally, so while the bearish turn with stocks may have given us a push forward, the better performance of gold involved more than this, perhaps our looking to recapture the amount that the market oversold it by earlier in the year.
Terry sees it going higher from here, although he doesn’t really share his reasons with us, as he’s more focused on Barrick Gold, the stock that he just upgraded from a hold to a buy on Wednesday. For Barrick to move up, we also need the price of gold to move up as well, and Terry does expect that.
This is where our current move comes in. We need to put this as gold needs to go up further than it has already. As we look at the charts, we do see quite a bit of resistance in our viewfinder, and remember that for 6 years now, gold has been unable to move up much past where it is now. This doesn’t mean that it won’t happen, but we will need the earth to shake a little more than it has, and we can be left wondering what exactly will cause such a shake and be on the lookout for it. A bear market with stocks might do it for instance, and this is actually the most promising suspect.
Terry does point out that there are some things to like about Barrick, but Barrick is chained to the price of gold to a large enough degree that we would need its price to rise a fair bit to really make this a bullish play.
Barrick Gold has been doing pretty well during this 7-month upward movement in gold, and is up 22% since October 1. Because they are stocks and are therefore traded based upon future valuations as well, gold stocks tend to be even more volatile than gold, and this is a great example of this at work.
This also means that the risk is higher as well, and Barrick lost a quarter of its value during the time that gold struggled last year. This not a stock that we should be even thinking of setting and forgetting, but certainly provides some nice opportunities for those who do pay attention and are ready to act when necessary.
Analysts don’t provide ratings, upgrades, or downgrades for stocks to benefit the buy and hold set though, they do so to inform those who actually do time their positions. When gold started to move last October, Barrick was already off its low in September by a comfortable amount. While it is too much to expect a fundamental analyst to be nimble enough to pick bottoms or even that close to the bottom, we do need to realize that this upgrade is really old news, and is basically 6 months and 20% old.
Still though, this upgrade may portend even more of an advance, even though Barrick does have some real resistance around $14 a share, and we’ve tested this level on three different occasions since this high-water mark was set a year ago, and each time we’ve failed to gain any real traction and have bounced off this resistance.
If Barrick is really a buy right now, we should wait and see if it can make it beyond $14 for any real length of time, and we’re actually currently on one of our bounces off this area as we speak, and the bounce happened back in December actually.
Barrick needs to stand and deliver more before we could say that it is a stock to really get that excited about, or wait until another good pullback like we saw last fall. In the meantime, it’s basically in a holding pattern right now. Gold going up in price a fair bit, as Terry expects, could change that, but that remains to be seen. If we really do see things moving in the right direction enough, then it may be time to act.