Gold Continues on a Bullish Path
Throughout history, gold has been money. Long before there were dollars, euros, yen, pounds, or any other government-issued currency instruments, gold has been a natural resource that has been an exchange mechanism and a store of value. Gold’s role in the financial markets has experienced its ups and downs, but since the turn of the current century, it has become more precious. Gold is a hybrid with industrial applications and economic value. Central banks, governments, monetary authorities, and supranational financial institutions validate gold’s role in the worldwide financial system as they hold the metal as a reserve asset. The International Monetary Fund classifies gold as a foreign exchange reserve asset.
In my Q4 report on the precious metal sector on Barchart, I wrote, “Gold, silver, and platinum were stores of value in 2022, and I expect that trend to continue in 2023. The precious metals could surprise on the upside as investor sentiment is the critical factor for the path of least resistance of the price of the metals.” In late January 2023, there is no reason to change that opinion.
Gold’s trend remains higher
The leading stock market indices posted significant losses in 2022, while bonds, real estate, cryptocurrencies, and most other asset classes moved lower. Gold’s marginal 0.13% loss last year was a testament to its role as a store of value. The nearby COMEX gold futures contract settled at $1,826.20 per ounce on December 30, 2022.
The chart shows that the gold futures market came charging out of the gate to the upside in early 2023, with the price reaching $1,949.80 per ounce on the nearby February futures contract. At $1,929.40 on January 27, gold was over $100 per ounce higher at the end of the first month of this year.
The long-term gold chart dating back to the mid-1970s highlights the bullish trend since the 1999 $252.50 per ounce low. Since then, every significant downside correction has been a buying opportunity. In 2022, gold traded to a record nominal high at $2072 in March before correcting to $1,613 per ounce in September. At around the $1,925 level, gold was sitting above the midpoint of the 2022 trading range on January 27, 2023.
The price action in the dollar index and bond market support gold
The decline to $1,613 in September 2022 came as the dollar and U.S. 30-Year Treasury bond futures moved to multi-year extremes.
The dollar index chart shows the index rose to a two-decade high of 114.745 in September 2022.
The U.S. 30-Year Treasury bond futures chart illustrates the rise in interest rates and decline in the long bond futures that took it to the lowest level since February 2011 in October 2022 at 117-19.
While the rising dollar and falling bond market were a toxic cocktail that set the stage for gold’s decline to $1,613, the index and bond market reversed since the September and October extremes, supporting gold’s rise over the past months.
U.S debt could be the most bullish factor in 2023
Gold is hard money because of its limited supply, precious nature, long history as a means of exchange, and its role in the gold financial system. In 2022, the official sector purchases rose to a more than half-century high, validating gold’s position as the ultimate form of money.
In 2023, the legacy of the global pandemic has caused the U.S. national debt to rise to an unprecedented $34.1 trillion. With a slim majority in the House of Representatives, increasing the debt ceiling and allowing the U.S. government to continue spending will be a hot-button political issue. Even if the debt ceiling moves higher, and spending curbs cause no additions to the debt, the Fed Funds Rate at a midpoint of 4.375% in late January means funding the debt makes it rise by nearly $1.5 trillion annually.
The mountain of U.S. national debt could lead to a default, but even if the ceiling increases, it weighs on the U.S.’s position as the world’s leading economic power and the U.S. dollar’s role as the global reserve currency. Moreover, geopolitical tensions at the highest level since WW II detract from the dollar’s attraction. The bifurcation of the world’s nuclear powers has economic consequences for the U.S. currency. Gold remains an asset that transcends borders. When Russia faced sanctions in early 2022, the country declared that 5,000 rubles could be exchanged for one gram of gold, immediately lifting the ruble’s value against the fiat U.S. dollar.
Many ways to include gold in portfolios
Since gold is the world’s oldest asset, it makes sense that portfolios maintain exposure to the leading precious metal. The most direct investment route is via physical gold bars and coins. Gold futures are the next level for investors and traders as they provide a physical delivery mechanism, and gold futures options can be exercised into gold futures positions.
Gold mining stocks tend to offer leveraged exposure to the metal as miners invest significant capital in projects to extract metal from the earth’s crust. When the miners sell gold above production costs, they profit, and a rallying gold price leverages those gains. Conversely, falling gold tends to cause miners to underperform gold prices during price corrections. Moreover, mining companies have idiosyncratic risks, including geography, management, and specific mining projects. Liquid diversified mining ETF products holding a portfolio of senior or junior publicly traded gold mining companies like GDX and GDXJ mitigate the idiosyncratic risks.
While there are choices for investors seeking gold exposure, the metal remains at the top of the heap.
GLD has been one of the most successful ETF products
In November 2004, the SPDR gold shares (GLD) burst on the scene, making it easier for gold investors to include exposure in portfolios. GLD trades on NYSEArca:
The fund summary states that GLD is the first U.S. gold ETF and holds physical gold bullion. At $179.22 on January 27, GLD had over $56.7 billion in assets under management. GLD trades an average of over 5.7 million shares daily and charges a 0.40% management fee. GLD is the most liquid commodity ETF with the most significant assets.
Gold rallied from $1,613.00 in September 2022 to the most recent high of $1,949.80 per ounce on the active month February contract or 20.9%.
The chart illustrates that GLD rose from $150.57 to $181.22 per share or 20.4% within that period. Since gold trades around the clock and GLD is only available for trading during the hours when the U.S. stock market operates, the ETF can miss highs or lows that occur during Asian or European hours. However, GLD does an excellent job tracking gold prices.
In markets, the trend is always your best friend, and gold remains in a bullish long-term trend in early 2023.
More Metals News from Barchart
- Dollar Firms with T-note Yields
- Stocks Recover Early Losses as U.S. Inflation Cools
- U.S. Economic Strength Boosts the Dollar
- Why Analysts Are Pointing to a Big Opportunity in Silver
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.