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Gold Is Undervalued, And That’s Great News For Precious Metals Funds
You could say gold miners struck gold in 2016. The group, as measured by the NYSE Arca Gold Miners Index, finished the year up an amazing 55 percent, handily beating all other asset classes shown below.
Miners were followed by commodities at 25 percent and silver at 15 percent. Gold finished up 8.6 percent, its first positive year since 2012, when it gained 7.1 percent. (Keep your eyes peeled for our forthcoming annual periodic table of commodity returns, one of our perennially popular pieces!)
I find it curious that many in the financial media continue to have a bias against gold, even though it generated better returns in 2016 than 10-year Treasuries and the U.S. dollar, which performed half as well. And when it was up as much as 28 percent in the summer, they still didn’t have anything positive to say, arguing it had gone up too much.
(Gold traders, on the other hand, have a much different opinion about the metal right now. A group of traders recently surveyed by Bloomberg revealed they are the most bullish on gold since the end of 2015, soon before it rallied in its best first half of the year since 1974. The traders cited geopolitical concerns, both in the U.S. and Europe, as well as stronger demand in 2017.)
And isn’t it interesting that the same media figures who are biased against gold are usually the same ones who seem to have only disparaging things to say about Brexit and President-elect Donald Trump? What they don’t realize is that if Brexit and Trump succeed, so too do the U.K. and the U.S. Are they hoping Brexit and Trump will fail so they can be proved right?
The smart people realize personal politics must be put aside. Despite supporting Hillary Clinton during the primaries, Warren Buffett now says he is behind the president-elect—because he knows that if the U.S. does well, he does well too. Despite campaigning hard against Trump, President Barack Obama says now we should all be rooting for Trump, regardless of our politics.
Negative Real Rates Should Drive Gold Prices
But back to gold. Coming up on January 28, we have the Chinese New Year, when demand for the yellow metal historically has risen, along with prices. This will be the year of the fire rooster, one of whose lucky colors is gold.
Throughout 2017, the precious metal should be supported by even deeper negative real rates, which could fall to their lowest level in two years as inflation outpaces nominal interest rate increases, according to UBS. In October, Federal Reserve Chair Janet Yellen suggested there might be some benefit in allowing inflation to exceed the central bank’s target rate of 2 percent before another hike is considered, which is good news for gold. Numerous times in the past I’ve shown that the yellow metal has tended to rise when real rates—what you get when you subtract inflation from the federal funds rate—fell into negative territory.
“Federal Reserve interest rate hikes could weigh on gold prices in the near term,” according to UBS’s house view. “But as real rates fall more deeply into negative territory through the next year, we expect prices to rise toward $1,350 an ounce.”
Gold Extremely Undervalued
Since Election Day, domestic stocks have rallied 6.5 percent while gold has dropped as much as 7.6 percent. What this means is gold is looking extremely undervalued compared to the S&P 500, which should appeal to value investors.
Look at the gold-to-S&P 500 ratio below. The lower the ratio, the more undervalued the metal is compared to blue-chip stocks. In fact, gold is at its most undervalued in at least 10 years right now.
Technically, gold still appears oversold, down almost one standard deviation now. As you can see, it’s moving back to its mean for the 60-day period, but there’s still time to capture potential growth.
Explore Investment Opportunities in Gold!
SPDR Gold Trust (ETF) (NYSE:GLD) was trading at $112.79 per share on Monday afternoon, up $1.04 (+0.93%). Year-to-date, GLD has gained 2.90%, versus a 1.38% rise in the benchmark S&P 500 index during the same period.
GLD currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #2 of 29 ETFs in the Precious Metals ETFs category.
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Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.
About the Author: Frank Holmes
Frank Holmes is the CEO and chief investment officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal, and in 2011 he was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. He is also the co-author of The Goldwatcher: Demystifying Gold Investing. More than 30,000 subscribers follow his weekly commentary in the award-winning Investor Alert newsletter which is read in over 180 countries.
Under his guidance, the company’s mutual funds have received recognition from Lipper and Morningstar, two trusted independent financial authorities. In 2015, Mr. Holmes led the company into the exchange traded fund (ETF) business with the launch of the U.S. Global Jets ETF, which invests in the global airline sector.
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