Why the sky is the limit for gold
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
The best reason not to buy gold is gone
Warren Buffett is a long-time skeptic of gold and for most of his life, his reasons were sound.
"The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you," Buffett said. "It is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time."
That's a valid point. Gold yields nothing in terms of coupons or dividends. It has limited utility as well. Most gold is dug up, melted down and then placed back underground in a vault.
For generations, the better bet was to buy bonds. In terms of safety, they could almost match gold and they produced steady income.
What has changed
Fixed income, in many cases, are now worse than gold.
Bonds now yield next-to-nothing. Fully 20% of the bond universe has a negative yield, meaning that you have to pay just to own them. Somewhere around 80% of the bond universe yields less than 2%, which is below the rate of inflation that central banks target.
Anything that's yielding significantly more carries a significant default risk or currency risk.
What's more is that bond yields may still have much further to fall
The head of the world's biggest asset manager said on Thursday that Treasury yields might continue to fall.
"I would not be surprised - I'm not predicting it - if somebody told me the 10-year Treasury is at 75 basis points, I would not be surprised," Blackrock's Larry Finktold CNBC.
He also said the stock market should not be at record high and characterized the latest rally as unsustainable. He pointed to short covering after the Brexit. In his flow data, he's seeing a rush into fixed income.
"I don't think we should be at new [stock] highs," he said. "All the stock repurchases, you're seeing this reduction in investable assets."
Part of what has hurt gold in the past week is that stocks are doing so much better. If he's right, that won't last.
The post-Brexit world
Central banks are the factor that could drive gold much higher.
Naturally, markets shuddered after the Brexit vote but what was telling was how jittery central banks were as well. It was similar earlier this year when worries about China and commodities led the Fed to reverse its hawkish bias.
Together, those events show that rates will stay lower for longer and the central banks will pull the trigger on fresh asset buys before the pull away the punch bowl.
Combine that with aging demographics in the Western world and a raging currency war and gold could double from here.
"The truth is that the world's financial system is broken, and yes, it is going to take some work to fix. Does it need a complete overhaul? That is yet to be determined," said Joshua Rodriguez at AO Markets.
In the meantime, the outlook for gold is good.
source