The Year 2020 will go down as one of the most disruptive years in modern day life and perhaps the most paradoxical year in the markets history. One fine example of where this paradox is self-evident is what is happening to Gold. In a Risk-On environment, you would expect Gold to rise. A traditional safe haven in times of uncertainty, when the times are highly uncertain and investors get fearful, Gold is where investors rush to. A time tested stalwart of value, you can balance your potfolio risk with a portion of Gold.
However, what is unique during this time is that Gold has continued to rally even while the markets have retraced their march lows to now August re-test of the all-time market highs. The last time that happened was 1979 when both gold and the S&P500 made new highs.. Gold is now over $2,000 an ounce. Historic data show that gold has tended to continue to rally when it starts to trade in record territory and this rally is launching on the heels of a seven-year base which provides fundamental strength for a sustained rally.
Risk is difficult to quantify in a pandemic which has no clearly defined end point yet and an economy that is requiring enormous sums of capital to prop it up. The unprecedented amount of money printing in such a short time period is another reason why investors are moving to gold. How much more debt will it require to get through COVID-19 and is the will there to keep increasing the mountainous debt load if the crisis drags on longer than many expect? What if this wains? In addition, the historic low (close to negative) yields coupled with the money printing impact on the dollar, allow asset managers and investors to make a strong case to move to gold. As more certainty is reached with respect to a likely endpoint for the pandemic, the case for gold will likely weaken but we believe the inflationary impact of the combined stimulus infusions into the economy will still make Gold an attractive asset to hold for some time until the impact of this is more known.
In is noteworthy and surprising move, Warren Buffet - who has always veered away from gold - just took a big stake in Barrick Gold. Why now? Buffet is clearly seeing a similar case for gold. Buying a stake in one of the worlds largest gold miners isa bet on rising or historically high gold prices and certainly rising profits for miners. VBy divesting out of airlines and now banks, Buffet is saying loud and clear that they see rising debt provisions and risk impacting banks and that they do not see a return to normal, anytime soon.
You can rely on Buffet for a healthy dose of common conservative sense! Gold remains a strong defensive asset in many investors minds, but not ever investor: "Don't chase the precious metals, BMO's Belski neutral on gold and silver prices"
Brian Belski, chief investment strategist at BMO Capital Markets warns investors not to chase the market here as gold tests resistance at $2,000 an ounce. He thinks it may be over-stretched at this point and maintains a "neutral" rating on it. He also mentions that gold equities now represent about 12% of the Toronto Stock Exchange (TSX), which is an all-time high weighting.
It is worth pointing out again that Buffett invested a big league gold mining company that is going to be reporting strong profits on the heels of a gold bull market and continuing strong gold prices in the short to mid-term.