Monday, June 19, 2017

Is There An Opportunity In Gold Right Now?

For a long time, I've considered Gold as a monetary goods that are driven by demand and supply more than an investment itself. It has a very long track of history itself and it was first used as a barter trade in 700 B.C.

A friend that I was close with has recently notified me that the long term downtrend of Gold was finally broken and that it might be on its way up again after breaking its 6 years downtrend.

Almost a decade of close to zero interest rates have atomized any form of risk aversion, and it is easy to see why people have generally flocked their preference to the equity markets in recent years. 

Gold price has also performed decently during this period and just when they tried to break their long term downtrend back in Aug 2016, they started going downhill again right after the market rallied after Trump was officially announced as President.

Trump announced a few fiscal measures such as the tax boost and the removal of the Dodd-Frank which excites and send the stock market flying to its high. This measures of Euphoria sends the gold stumbling back into consolidation mode again.

Still, if you are one that holds gold since 2000, you are looking at a average gain of about 11% today. These are the period when gold starts to make their strong run boom days mostly from the period from 2005 to 2007.

3 Cases To Go Long on Gold

1.) GSCI Commodity Index / S&P 500 Ratio

The GSCI is a typical measure indicator for commodity prices and is a very strong inflation indicator correlation. It includes many different types of commodities such as gold, oil, energy, most of which are in the low right now.

From a historical context, the relative valuation of the GSCI to the equity markets seems very low right now which might suggest potential opportunities to be a contrarian.

2.) Long Term Technical Broken

From a technical point of view, it appears that gold has finally managed to break their long term downtrend and it might gain momentum from hereon.

3.) Gold as a hedge to your equities exposure

Gold has a strong correlation against other asset classes in particular the equities market. They typically act as safe haven during periods of uncertainties and recession, where it proceeds with stock market crashes.

Here are the inverse correlation of gold with equity markets as far dated over the past 4 decades:


There are many passive investors who are embarking on a permanent portfolio strategy, and gold is an important part of that strategy.

The biggest opportunity cost for holding gold is when the stock market is going on a rampant bull run but recently it has exhibited signs of going up when the stock market is also rising.

I've been contemplating a long time whether my portfolio should consists of gold as part of that strategy. So far, I have not done so because I originally believe in the simplistic cash/equity allocation model. Perhaps, it is now time to reconsider that.

Thanks for reading.
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  1. Shhhh, B, you famous blogger. Later you blog liao gold price go up, I can't buy liao :(

    Just kidding. XD

    1. Hi UN

      Hahaha that's almost for certainty impossible but its something I'm also looking to add onto my portfolio if the time is right.

  2. Are you foreseeing a market downturn ahead? You increased cash position, and now looking into gold.

    1. Hi James

      Not as fast but definitely something which I am looking to as the equity market valuation in my portfolio gets higher and is getting less compelling to hold.

      I might just rebalance a bit here and there to hedge my gains in equities which have been quite phenomenal this year due to the bull run.

  3. B,

    Here is another reference article which says the similar.

  4. i think Gold is a good hedge against Singapore linked investment. However i do not see why gold fundamentally to go up significantly against rising rates vs USD.

  5. cash/equity/bond shld be the formula. but actually gold kind of belong to cash category.

  6. you can combine your gold thesis and equity allocation model by buying gold mining firms

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